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High inflation has rocked the U.S. economy this year, driven in large part by events that happened during the depths of the pandemic. Low interest rates, stimulus checks, supply chain disruptions, and geopolitical conflict have all conspired to send prices soaring.
While many Americans have been adversely affected, high inflation has been especially challenging for retired workers, most of whom live on less than half of their pre-retirement income, according to Goldman Sachs.
Fortunately, big changes to Social Security, Medicare, and the federal income tax brackets could bring some financial relief next year. Here are the important details.
Social Security benefits get a historic cost-of-living adjustment
Each year, a cost-of-living adjustment (COLA) is applied to Social Security benefits to offset the impact of rising prices. Since inflation is lingering near a four-decade high, beneficiaries will receive an unusually large 8.7% COLA in 2023. That ranks as the largest increase in benefits in more than four decades.
How big is the impact? According to the Social Security Administration, the average monthly benefit paid to retired workers will reach $1,827 next year, which would equal an increase of $146 per month (or $1,752 for the full year). That extra cash should provide retirees with some additional financial security in 2023.
The standard Medicare Part B premium and the annual deductible will decrease
The standard Medicare Part B premium soared 14.5% to $170.10 per month in 2022, and the annual Part B deductible climbed 14.8% to $233. Those price hikes outpaced the 5.9% Social Security COLA this year, meaning benefits lost buying power due to the rising cost of Medicare.
Fortunately, the standard Part B premium will drop 3% to $164.90 per month in 2023, and the deductible will fall 3% to $226 per year. That means most retired workers will save about $70 on Medicare next year. That alone isn’t much, but the combination of a historic COLA and lower Part B premiums may be a once-in-a-lifetime event.
A smaller portion of earnings will be subject to federal income tax
The Internal Revenue Service (IRS) recently issued inflation adjustments for tax year 2023, which apply to tax returns filed in 2024. Two of the biggest changes concern the standard deduction and the tax brackets, both which should mean retired workers pay tax on less income next year.
The standard deduction: The standard deduction will increase by about 7% in 2023. Single individuals will be allowed to deduct $13,850 (up $900) and married couples filing jointly will be allowed to deduct $27,700 (up $1,800) when calculating their taxable income.
Federal income tax brackets: The seven marginal tax rates will not change next year, but the income thresholds that define each of those brackets will will increase by about 7% across the board.
The table below applies to single individuals in tax year 2023.
Tax Rate
Taxable Income (Single)
Tax
10%
$0 to $11,000
10% of taxable income
12%
$11,001 to $44,725
$1,100 plus 12% of the amount over $11,000
22%
$44,726 to $95,375
$5,147 plus 22% of the amount over $44,725
24%
$95,376 to $182,100
$16,290 plus 24% of the amount over $95,375
32%
$182,101 to $231,250
$37,104 plus 32% of the amount over $182,100
35%
$231,251 to $578,125
$52,832 plus 35% of the amount over $231,250
37%
$578,126 and above
$174,238.25 plus 37% of the amount over $578,125
Data source: Internal Revenue Service.
The table below applies to married couples filing jointly in tax year 2023.
Tax Rate
Taxable Income (Married Filing Jointly)
Tax
10%
$0 to $22,000
10% of taxable income
12%
$22,001 to $89,450
$2,200 plus 12% of the amount over $22,000
22%
$89,451 to $190,750
$10,294 plus 22% of the amount over $89,450
24%
$190,751 to $364,200
$32,580 plus 22% of the amount over $190,750
32%
$364,201 to $462,500
$74,208 plus 32% of the amount over $364,200
35%
$462,501 to $693,750
$105, 664 plus 35% of the amount over $462,500
37%
$693,751 and above
$186,601.50 plus 37% of the amount over $693,750
Data source: Internal Revenue Service.
For more detailed information on the adjustments to federal income tax, you can refer to the IRS.
Here’s the bottom line: Americans will effectively get a tax cut in 2023. The bigger standard deduction and the higher earnings thresholds mean less income will be subject to tax next year. That is especially good news for retired workers. A smaller tax bill combined with a bigger Social Security benefit and a smaller Medicare Part B premium means retirees should have a little extra money in 2023.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs. The Motley Fool has a disclosure policy.
