Tax brackets have also been raised because of inflation.
Anyone who has spent time at the grocery store recently has seen some of the drawbacks of living in inflationary times. But there also are some benefits to interest rates going up: Your take-home pay may be increasing even without a pay raise, thanks to a higher standard deduction on your taxes.
Due to historic inflation levels in 2022, the IRS increased the standard deduction by 7% for 2023, the largest inflation-linked boost since the IRS started making such adjustments in 1985. The standard deduction for 2023 is $13,850 for single filers and $27,700 for married taxpayers who file joint returns. The IRS also increased the income levels for each tax bracket, meaning you can potentially earn more without getting bumped into a higher bracket.
So even if you didn’t get a raise this year, you could still end up able to keep more of your paycheck. If no one claims you as a dependent on their taxes, you’ll benefit from the higher standard deduction as long as you’re among the 90% of taxpayers who do not itemize their taxes, since a higher standard deduction means you’ll have to pay taxes on less of your income.
You should have seen the adjustment to your income starting with your January paychecks. If you didn’t, you may want to examine your pay stub to make sure you’re still having the appropriate amount withheld by your employer for taxes. Withholding too much can result in a big rebate when you file your taxes, but lowering your withholding to better reflect your financial situation could mean more money in your pocket every time you get paid. You can get your paycheck up to two days early each week by using direct deposit with your Fifth Third Momentum Checking Account. If you need to change your withholding, you can file a new W-4 form with your employer.
Depending on where you live, you may also benefit from changes to state taxes this year. Eleven states reduced their income taxes in 2023, according to the Tax Foundation, and Georgia increased its standard deduction for taxpayers.
Ways to Use Extra Funds
Aside from using that extra cash to cover the rising cost of groceries and gas, here are a few money-smart suggestions for what to do with the extra funds:
- Build your emergency fund. Experts advise having at least three to six months’ worth of expenses set aside in a liquid account that you can access in case you experience an unexpected event like a job loss or major home repair. That way, when such events occur, you won’t have to turn to credit cards or borrow money from your 401(k). Another inflationary benefit for consumers is that interest rates on savings accounts are on the rise, meaning that you’ll be able to earn a more meaningful return on your savings than you may have in years past.
- Pay off high-interest debt. With interest rates rising, the sooner you can pay off high-interest debt such as credit card bills, the better your finances will be. Start by directing any extra funds toward the card that has the highest interest rate. Once that’s paid off, direct all your extra cash toward the card with the next highest rate.
- Invest in your retirement. You should be contributing at least enough to your 401(k) to get any match offered by your employer, but you’ll want to increase that amount over time, aiming for 10% to 15% of your pay. Like the standard deduction, the contribution limits for retirement account contributions are indexed to inflation, so the amount you can contribute also went up this year to $22,500 per worker ($30,000 for workers age 50 and older).
Don’t have a 401(k) at work? Consider opening a Fifth Third Traditional Individual Retirement Account (IRA), which offers similar tax advantages to people saving for retirement. The contribution limits for those accounts are $6,500 for people under age 50 and $7,500 for those 50 and older.
- Save for a near-term goal. Whether you’re dreaming of a new home or car, a kitchen renovation, or a bucket list vacation, earmarking funds toward the big purchase can help you make it a reality without hurting your long-term financial security.