In 1950, the average price of plain white bread was $0.12. Today, the average cost has reached an all-time high of $1.61. Although these numbers may not seem that different, they demonstrate a 1243% increase in price. These rising costs are due to inflation, which is the decrease in the value of money. Inflation can impact various services and goods, affecting the cost of our everyday needs.
The United States is currently facing its highest inflation rate in more than four decades — are you prepared to face the impact inflation may have on your 2023 taxes?
While annual salary increases can help combat some of these rising costs, they may not be enough to close the gap. With your dollar not stretching as far as it once did, it’s crucial to understand how inflation may impact your tax return. What causes inflation? And how will inflation be next year’s taxes? Follow along to see what AA Tax & Accounting Services, LLC says.
What Is Inflation & What Causes It?
Inflation is the increase in the costs of goods and services or the decrease in the value of money. It is natural for inflation to occur as the cost of living increases, but sometimes inflation impacts your wallet more than average. You may also experience inflation if there is a shortage of a product or service, causing an increased demand.
Inflation has a direct impact on the production of goods. If the demand for a product goes up, the cost of the product is likely to increase due to rising production costs to meet the demand. The cost of the product can also be impacted if the supply decreases. While some inflation is expected to occur naturally over time, some is caused by supply and demand.
How Inflation Can Lead to a Higher Tax Bill
Now that we’ve covered what inflation is and how it may impact the cost of the goods and services you need, it’s time to delve into how inflation can lead to a higher tax bill. Going into each tax season, the Internal Revenue Service considers the cost of living and makes any necessary adjustments to tax brackets.
Although the tax brackets are in place to ensure you’re taxed fairly based on your income, they don’t always consider inflation. This means that if inflation isn’t allowing your dollar to spread as far, you may end up with a higher tax bill.
Planning for Your 2023 Taxes with Inflation
Inflation can be daunting, especially if you want to avoid paying more towards your tax bill in 2023. One of the most effective ways to ensure you aren’t negatively impacted by inflation come tax season is to ensure your wage matches the current cost of living. As the cost of living increases, you should make sure your salary aligns with the going rate.
Suppose you’re being undervalued, and your wage doesn’t match the current market rate. In that case, you need to be comfortable negotiating with your company for higher compensation or searching for a new opportunity with a higher salary.
Tax Consulting Services in Cedar City, Utah
Tax season is stressful for many individuals, especially when inflation is involved. But it doesn’t have to be! We recommend consulting certified public accountants like AA Tax & Accounting Services for help making any decisions related to your tax return with inflation.
From one-time tax consulting services to ongoing consulting services, our tax consultants work with many clients as their tax advisors and tax preparer — ensuring that your tax team understands your taxes backward and forwards. With our tax consulting services, you can have peace of mind knowing that our team has the experience to provide you with the most effective strategies for maximizing deductions and tax credits.
The AA Tax & Accounting Services team can help you execute the right tax strategies. Contact us to schedule an appointment.