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Americans are strapped right now. The cost of food, energy, and daily staples has had the fastest price increase in decades. And the value of most stocks and cryptocurrencies has lagged. Plus, the real estate market, which was booming most of the year and helped buoy many investors, has begun to cool off. As a result, many Americans are budgeting more and spending less.
In response, the IRS confirmed in October that there would be tax inflation rate adjustments for the 2023 tax year. While this tax inflation adjustment rate won’t take effect until filing in 2024, there are things that investors and financial advisors need to know now to maximize their returns.
Tax Inflation Adjustment Rate Details
For the tax year 2023, the top thing to know is that the standard deduction for married couples filing jointly will rise to $27,700, which is up $1,800. Single households and married filing separately will rise to $13,850, up $900. And lastly, for the head of households, up $1,400 from the previous year, the standard deduction will be $20,800. This increase is about 7%.
For Americans whose salaries have kept pace with the rising inflation, they will not be affected. However, according to the Labor Department, most inflation-adjusted weekly earnings declined by nearly 4 percent.
Special circumstances and exclusions were also updated. While they don’t apply to most households, the savings could be massive for those that can capitalize on these updates. These include increases for annual exclusion for gifts, foreign earned income exclusion, and basic estate tax exclusion for inheritances.
Along with the IRS increases for tax inflation adjustment rates, the Social Security Administration increased COLA by 8.7% for Social Security benefits and SSI payments beginning in January 2023. It was the largest increase in benefits since 1981.
The Effects for Investing
Directing your clients to the right investment strategies now is more imperative than ever for financial advisors. While there are few meaningful changes to personal income tax, there are ways savvy financial advisors can provide value to their clients. Get familiar with the following Inflation Reduction Act’s provisions:
- Tax credits for energy-efficient home improvements
- Electric vehicle tax credits
- Expansion on premium tax credit eligibility
- Pass-through tax break limits
More good news for financial advisors was that there were no changes to backdoor Roth IRA rules. Many were concerned since it would impact the work done to promote contributions to higher earners. Additionally, clients can tap the spousal lifetime access trust, allowing distributions from the trust to provide income. Because with these trusts, the grantor pays taxes personally, the trust grows without incurring income tax.
Descendants trust may be a better option for some clients where the grantor’s spouse isn’t a beneficiary. These trusts can be set up for the grantor or trust responsible for income tax and are very flexible overall.
There are plenty of options for financial advisors to help their clients weather the current storm and find security in their futures. By understanding the implications of the Inflation Reduction Act and how it affects where and how people invest, you can provide valuable feedback to your clients.
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You’ve got the knowledge and insight to help clients with the changes that 2023 will bring. When you want to add more clients to your schedule, partner with LeadingResponse. Our consultants are here to walk you through the ideal financial advisor solutions that turn prospects into clients. Learn more.