One of the many lessons we’ve learned in the post-pandemic era is that people really dislike inflation. In poll after poll, respondents describe how inflation feels like an unfair tax levied upon them (whereas wage gains are something they have earned or deserve).
Although the rate of change in prices has slowed dramatically from the peak in July of 2022, the price level is unlikely to return to where it was in 2019. As of last month, the consumer price index is still growing at an annual rate somewhat above 3%. It doesn’t help that frequent reminders of today’s higher prices are everywhere, at the grocery store and the gas station especially.
Despite its unpopularity, is there any way to make lemonade from the inflation lemon?
The most obvious beneficiaries of inflation are borrowers, including governments, corporations, and private citizens. Since the repayment terms on most loans are fixed, the “real” (inflation-adjusted) value of the liability declines over time; higher inflation only accelerates this process. In other words, borrowers are repaying their loans with dollars that are worth slightly less each month. On a 20-year student loan or a 30-year mortgage, for example, inflation’s effect can become quite pronounced by the time these loans mature, easing the debt burden over time.
But how can savers and investors make the most of an inflationary environment? Besides structuring your portfolio to earn inflation-beating returns, one of the best ways to make sure you are not allowing inflation to derail your financial plan is by taking advantage of any adjustments to key financial numbers each year. But what, exactly, is a “key financial number”?
In a nutshell, these are the numbers that control how much we are allowed to contribute to certain retirement accounts, the taxes we may owe on income, investments and gifts, and the costs and benefits of entitlement programs like Social Security and Medicare. Did you know that nearly all of these numbers change each year in response to new inflation data? They do, and part of your year-end financial checklist should include reviewing those new numbers and updating your tax and savings strategies as necessary.
Let’s start by taking a look at the changes in federal marginal tax brackets for 2024. In general, tax brackets increased by 5.4% across the board compared to last year. In 2023, a married couple could earn up to $89,450 in taxable income and remain in the 12% tax bracket. This year, that bracket goes up to $94,300 before the 22% marginal rate kicks in. Marginal tax rates are adjusted each year regardless of filing status. For example, a single filer can earn up to $191,950 and remain in the relatively low 24% bracket this year, up from $182,100 last year.
Retirement contribution limits have also gone up. Elective deferrals by employees to 401(k)-type plans have increased to $23,000 this year from $22,500 last year. IRA and Roth IRA contributions are now $7,000 (before an extra $1,000 in catch-up contributions if eligible) compared to $6,500 last year. Health Savings Account (HSA) limits have increased as well to $4,150 (individuals) and $8,300 (families) from $3,850 and $7,750, respectively, in 2023.
The annual gift tax exclusion limit has also increased to $18,000 per person this year. Last year, a married couple could give away up to $34,000 to any one individual without having to worry about filing a gift tax return. This year’s inflation-adjustment raises that amount to $36,000 for 2024. The federal estate tax exclusion amount has also been adjusted for inflation to $13,610,000 from $12,920,000 last year. (Note this amount will be reduced by about 50% in 2026 due to the expiration of the Tax Cuts and Jobs Act at the end of 2025.)
And lastly, anyone currently on Medicare might benefit from inflation adjustments to the Income-Related Monthly Adjustment Amount (IRMAA). Since Medicare premiums are based on one’s Modified Adjusted Gross Income each year (with a two year “lookback”), beneficiaries may find that their premiums have dropped if their MAGI falls into one of the more favorable brackets this year.
There is no doubt that inflation itself remains deeply unpopular – no one enjoys paying more for the same items each year. But there are some ways to take advantage of inflation, as well. As we know, fixed-rate borrowers will benefit from inflation’s effects over time. For savers, becoming aware of the changes in key financial numbers and making adjustments to your personal savings strategy is one way to help ensure that you are keeping up with inflation.