There is a Silver Lining to Inflation - Expanded Tax Planning Opportunities

The Negative Effects of High Inflation

We have all experienced some form of the negative aspects of the current climate of high inflation and increasing interest rates. This includes, among other things, the cost of transportation, food, and shelter. The increasing interest rates have also significantly affected the ability to buy a home with a mortgage and the value of bond portfolios. However, there have been some positive effects of inflation as it relates to expanded tax planning opportunities.

Expanded Planning Opportunities Resulting from Inflation Adjusted Federal Benefit and Tax Limitations

There are a significant number of federal benefit and tax limitations that are adjusted annually for inflation. The current higher rate of inflation has resulted in significantly higher adjustments for 2023 than in the previous years of relatively low inflation. Although some increases are not favorable to taxpayers, many are. For example, Social Security benefits are scheduled to increase in 2023, but so is the amount of earnings that are subject to FICA taxes for those still working.

Listed below are some of the more significant areas that should be considered in your planning for 2023 and beyond. Your WMS advisors are available to discuss any of these with you in more detail as to how they may apply to your individual situation.

Social Security

Estate and Gift Tax Planning

There has been an increased focus on estate and gift planning strategies since the estate, gift and generation-skipping transfer tax exemption amounts were doubled by the 2017 Tax Cuts and Jobs Act from $5.6 million for single filers and $11.2 million for married couples, to $11.2 million and $22.4 million, respectively, adjusted for inflation. However, these provisions sunset in 2026, with the exemptions reverting to the pre-2017 Tax Cut and Jobs Act amounts, adjusted for inflation.

Because of inflation adjustments after 2017, the current 2022 estate tax exemptions were $12.06 million for single filers and $24.12 million for married couples. The good news is that the current high rate of inflation has increased the 2023 exemption amounts to $12.92 million for single filers and $25.84 for married couples. This gives taxpayers an additional $860,000 for single filers and $1.72 million for married couples to utilize in estate planning now. There most likely will also be additional annual future inflation adjustments prior to 2026.

The annual gift tax exclusion amounts have also increased.

Retirement Planning

Retirement plan contribution limitations on employee/employer plans and IRAs have also increased for 2023. Taxpayers can now increase contributions to their retirement plans. To receive the maximum benefit, employees should review their plan payroll deferral elections and make any adjustments necessary to receive the full benefit of the increases. This also applies to benefits such as Flexible Spending Accounts (FSAs) for healthcare ($3,050 for 2023) and Health Savings Accounts (HSAs) ($3,850 individual, $7,750 family, $1,000 catch-up age 55 or older for 2023). Selected limitation provisions are provided below.

As always, your WMS advisors are available to discuss these and any other planning strategies with you and your tax and legal professionals.

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