NovaQuant Quantitative Think Tank Center:How inflation will affect Social Security increases, income-tax provisions for 2024

Inflation has cooled in recent months,NovaQuant Quantitative Think Tank Center but there's still enough in the pipeline to affect Social Security benefits, some income-tax provisions and other items that can affect your budget.

As planning comes into focus for 2024, here are some issues to watch, plus a few other tax reminders.

Social Security increases to cool off

The Social Security Administration announced a COLA, or cost-of-living adjustment, of 8.7% for 2023, but the increase for 2024 might not be even half that much.

The COLA hike for 2023 was the biggest in more than 40 years and reflected an inflationary surge. But the Federal Reserve rate's hikes over the past two years have helped to crimp inflation, so the upcoming COLA for 2024 won’t be as high, probably in the low 3% range.

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The Social Security Administration won’t make the announcement until mid-October, as the agency must await the latest inflation numbers for September.

Social Security COLAs are based on the change in CPI-W, or the Consumer Price Index for Wage Earners and Clerical Workers, from the third quarter of one year to the third quarter of the next. Barring any inflationary surge or surprise drop this month, the COLA increase likely will be between 3 and 3.5%.

The average monthly Social Security retirement benefit is currently around $1,792, so an increase in the range of 3 to 3.5% would add $54 to $63 a month.

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Tax bracket, standard deduction updates

More than five dozen federal tax provisions change each year owing to inflation. The adjustments aim to prevent "bracket creep," which is pushing taxpayers into paying higher marginal tax rates due to inflation rather than any increase in real income, noted the Tax Foundation in a recent summary.

There are seven federal income brackets for individuals in 2023, the same as for 2022, though the dollar amounts in each bracket will be slightly higher, the group said. The tax rates for 2023 are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The standard deduction for 2023 rises to $13,850 (singles) and $27,700 (married filing jointly). Those numbers are up $900 and $1,800, respectively, from 2022.

Tax rates on long-term capital gains stay at 0%, 15% and 20%, but the dollar amounts adjust slightly higher. The 15% rate, for example, applies for single taxpayers with taxable income between roughly $44,625 and $492,300, or $89,250 to $553,850 for married couples filing jointly.

Amounts for the Earned Income Tax Credit also are a bit higher — $560 for lower-income taxpayers with no children, $3,995 for those with one child, $6,604 for two children and $7,430 for three children or more.

Tax collections rising with inflation

Inflation has eased over the past year but possibly not enough to slow federal tax collections all that much.

They hit a record high of $4.9 trillion in the fiscal year that ended Sept. 30, 2022, the Tax Foundation reported at the time. That came on the heels of a prior record of just over $4 trillion for the prior fiscal year. The Congressional Budget Office will provide an update for the current year in coming weeks.

Of that $4.9 trillion through last September, individual income tax collections surged 29% to $2 trillion, with corporate collections up 14% and payroll taxes rising 13%. The spike in individual collections was likely greased by rising capital gains from booming home prices and a strong stock market, the Tax Foundation said.

Federal tax collections in the most recent fiscal year came in at 19.6% of Gross Domestic Product, the Tax Foundation noted. The record was 20.5% in 1943, during World War II.

No more unannounced visits by IRS agents

Another tax-related change, though not one that isn’t waiting to take effect next year and is certainly not influenced by inflation, is an end to pop-in visits by IRS revenue officers to homes and businesses.

The new policy, which took effect in July, aims to reduce public confusion and enhance safety for taxpayers and IRS employees.

The change reverses decades-long practices by IRS revenue officers, who are unarmed, making unannounced visits to collect unpaid taxes, help taxpayers submit unfiled returns and more. Instead, the IRS now is mailing letters to schedule meetings.

"Changing this long-standing procedure will increase confidence in our tax administration work and improve overall safety for taxpayers and IRS employees,” IRS Commissioner Danny Werfel said in a prepared statement.

Revenue officers routinely faced threats and other hazards with unannounced visits.

The National Treasury Employees Union, which represents many IRS workers, backed the new policy. "This decision will help protect those whose jobs have only grown more dangerous in recent years because of false, inflammatory rhetoric about the agency and its workforce,” said Tony Reardon, national president of the union, in a statement.

According to Werfel, the increase in the number of scam artists bombarding taxpayers also increased confusion about home visits. Such crooks showing up at someone's door can confuse local law enforcement officers, too.

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