Paul Neiffer: When Can Inflation Help You?
We know inflation has rapidly increased in the past year, both on the farm input side and normal living costs. The increase has caused angst for many, however, there is at least one area where inflation is good for us. Believe it or not, it is income taxes.
Until about 20 years ago, almost all income tax rates, values, etc., were not indexed to inflation. A prime example is how social security income is taxed. The taxation of social security began in 1984 with up to 50% of social security income being taxed if your adjusted income was more than $25,000 for singles and $32,000 for married couples.
Congress changed the rules in 1993 to 85% of social security income being taxable if your adjusted income is over $34,000 (single) or $44,000 (married). These brackets have never been indexed to inflation. If inflation had been applied, the brackets could be easily three times higher.
ESTATE TAXES AND GIFTING
IRS tax inflation adjustments are expected to be around 7.1% for 2023. So, let’s review some of the major items where inflation will help us.
First, the lifetime estate tax exemption is $12.06 million, and it will likely increase by $860,000 next year to almost $13 million. Married couples can now shelter another $1.72 million of assets that would be exempt from estate tax in 2023.
Farmers who make annual gifts to their kids now can give $17,000, up from the $16,000, which was in place for only one year. All the income tax rate brackets will be adjusted up by about 7.1%. For example, the top 37% tax bracket will now start at $693,750 instead of the current $647,850.
The standard deduction amounts will increase; the Section 179 deduction will increase $80,000 to $1.16 million; and the Section 2032 allowance will increase almost $100,000.
SOCIAL SECURITY BENEFITS
Social security benefits will increase even more than the income tax brackets. The Social Security Administration has not released final numbers, but we expect these benefits to increase by about 8.7%.
The current average monthly benefit of $1,547 should increase to about $1,682, and it will be about $5 higher since the deduction for Medicare premiums will drop from $170.10 to $164.90.
The bottom line is inflation helps us with our taxes (but very little else). Even farmers who will receive a nice increase in their social security benefits will likely see most of that benefit disappear with increased living costs.
Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA. He grew up on a farm in central Washington and still resides in the state.
