The Wrap: You May Get More Take Home Pay Next Year Thanks to Inflation
Inflation May Reduce Your Taxes
So you go to the grocery and other stores and see that inflation has pushed prices up. You can not buy what you used to or as much of it. You find yourself sliding into the inflation blues.
Well, cheer up Sparky! Thanks to inflation, you may take home more money from your paycheck in 2023.
More Take-Home Pay
This week, the Internal Revenue Service (IRS) issued new inflation-adjusted tax rates for 2023.
Those adjustments mean your wages next year may fall into a lower tax rate. In addition, you may be able to deduct higher amounts of income. The net result? You may pocket more money from your paycheck.
The changes take effect in January. As a result, you will not see the savings in your 2022 tax return which must be filed in April.
“It is very likely that you would see more in your paycheck starting in January [due to the IRS inflation adjustments, which] tend to result in lower withholding for a given level of income,” federal tax analyst Mark Luscombe told CNN.
Brackets Going Up
On average, tax brackets will go up by about seven percent, according to the IRS.
The adjustment would have been higher. However, changes in former President Donald Trump’s 2017 tax overhaul held rate changes down. That measure ties tax rate adjustments to the chained Consumer Price Index as opposed to the standard CPI. The chained CPI tends to rise slower than the standard.
The lowest bracket taxes income at a rate of 10 percent on the first $11,000 earned by single filers and $22,000 for married couples filing a joint return.
Over those amounts, incomes for single and joint filers are taxed at 22 percent up to $44,725 and $89,450 respectively. Over incomes of $95,375 single filers and $190,750 joint, the rate moves to 24 percent. High-Income earners are taxed at 32 percent on incomes over $182,100 single and $364,200 for joint filers. The top bracket of 37 percent applies to single incomes over $578,125 and $693,750 for joint filers.
Standard Deduction Increases
Chances are, you do not itemize deductions when you file taxes. In fact, most taxpayers take the standard deduction. Well, there is good news there as well.
The new 2023 standard deduction for single filers will be $13,850. That is a $900 increase from 2022. Joint filers will be able to take a $27,700 standard deduction – a $1,800 increase.
Child Tax Credit Goes Up
The IRS changes for 2023 include an increase in the Earned Income Tax Credit (EITC) of about seven percent.
The EITC is for low-income families. Unlike the tax bracket changes, the EITC change will not get the extra money to qualifying families until they file their 2023 taxes.
60-40 Portfolio Takes A Hit
The classic 60-40 investment portfolio is having one of its worst years in history.
The 60-40 portfolio is an investment teeter-totter balanced by 60 percent stocks on one end and 40 percent bonds on the other. The idea is that volatility on one side will be balanced by stability on the other. That is because stocks and bonds almost never go down at the same time. When they do, it is called a negative correlation.
Depression Era Losses
Through the end of September, the 60-40 portfolio is down 20 percent. Only two years during the Depression faired worse. However, if you consider inflation, things could be worse.
On an after-inflation “real” basis, this is currently likely to be the worst year ever for a traditional 60/40 stocks and bonds portfolio:
1974: -25%
1937: -24%
1931: -24%
1946: -20%
2008: -18% https://t.co/9sSTDgSqvs— Meb Faber (@MebFaber) September 29, 2022
“Considering the tough year for the markets, the chorus of the ‘death of the 60/40’ portfolio tends to get louder,” says Melissa Shaw, wealth manager at TIAA told U. S. News
60-40- Tweaks
Many financial advisors are adding a third element to the 60-40 tetter totter – cash.
However, that is only a short-term solution to market volatility or a way to pad your emergency fund.
Others suggest shifting to value stocks.
“Value stocks tend to perform better during challenging market conditions, while growth stocks perform better when market conditions are more favorable toward investors,” Jeremy Bohne, founder of Paceline Wealth Management in Boston, told U. S. News.
Conclusion
No one size fits all. The 60-40 portfolio is a general starting point for portfolio design. Your asset allocation may vary depending on your age and needs. However, it should be designed with long-term goals in mind.
“Asset allocations are designed to be followed over the course of many years,” says Charles Rotblut, vice president of the American Association of Individual Investors. “You shouldn’t abandon it because it’s not working now.”
Supply Chain Improving
Two Years ago this month, ocean-going container ships began dropping anchor outside the ports of Los Angeles and Long Beach — waiting weeks to enter and unload their cargo. That was the beginning of what became part of mammoth supply chain problems still impacting us today.
The good news is that the supply chain is improving and a return to normal is on the distant horizon.
How It Began
The five supply ships laying in anchor outside Southern California ports in October 2020 grew to 40 the following February. Last year at this time, the number of ships waiting to enter those ports rose to 60 and peaked at 109 last January. As of last week, the number was down to nine.
Trending Toward Normal
Indeed, the latest metric indicate the supply chain is returning to normal.
The Logistics Managers’ Index, reports that “September’s future predictions hint at normalization and a return to business as usual over the next year.”
Research firm Oxford Economics shows similar findings.
“Supply chain strains eased in September after increasing slightly in August.” says an Oxford Economics report. “Transportation pressures subsided the most of all our tracker’s components, price pressures recorded a third straight monthly decline, and inventories improved.”
Even the New York Federal Reserve Bank agrees that the supply chain is straightening out. The bank’s September Global Supply Chain Pressure Index showed easing for five months in a row.
The NY FED reported, “year-to-date movements suggest that global supply chain pressures are beginning to fall back in line with historical levels.”
Impact On Inflation
Last year, as inflation began its historic climb, Fed Chair Jerome Powell said the move was “transitory”. He based that assessment in part on the belief that supply chain problems would be resolved quickly.
The Fed has identified supply chain disorders as a major factor in fueling inflation. Further, it reasons that resolving those issues will help tame high prices. However, though the supply chain is moving in the right direction, the central bank is cautious.
In a speech last week, Lael Brainard, vice chair of the Federal Reserve said, “global supply chains have eased significantly, but by some measures, they are still more constrained than at nearly any time since the late 1990s.”
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