How the Continuous Rise In Inflation Can Cause Higher Tax Bills

The most significant price hike in over thirty years came to play last month, with the consumer price index increasing by 6.2%. While various tax changes are a reflection of the higher cost, unchanged provisions can squeeze filers as purchase power dwindles. 

The continuous increase in inflation also affecting stocks traded on eToro has made the IRS boost federal income task range for the coming year, 401k contribution limits and standard deductions, and more. Although other provisions remain the same, leading to increased tax bills over time. 

Analyst view

Larry Harris, a certified professional planner and director of the tax service at Parsec Financial from North Carolina said, “It’s a hodgepodge of things that get left out. And it’s not just hitting wealthy taxpayers.”

For instance, couples filing together selling their home can avoid up to $500,000 of profit from capital gain taxes if they pass the ownership and use test where a single filer can only exclude up to $250,000. 

These values have remained the same since 1997 despite the average price of home sales doubling over the past 20 years and property values outweighing wages over the past ten years. 

Leonard Burman, co-founder of the tax policy center and institute fellow at Urban Institute, said fixed exemptions are by design. 

 “I think the intent was for that exemption level to decline in value over time,” he said. “Basically, it’s a way of phasing in a tax increase or at least limiting the revenue costs.”

The tax threshold has also remained the same for decades. At the moment, about 85% may be taxable if levy free interest, adjusted gross income, and one-half of social security benefits exceeds $34,000 for single filers and $44,000 for married couples filing together 

Here’s what Burman said, “I think the intent was to have more Social Security benefits taxable over time. And it was a way to slow the hemorrhaging of the Social Security trust fund.”

Taxes for huge earners 

Harris said another example of fixed provision is the threshold of a  3.8% surcharge on investment income which was fixed by President Barack Obama. The levy comes into play when modified adjusted gross income exceeds $250 000 for couples and $200,000 for single filers; there hasn’t been any adjustment leading to high taxes for huge earners year in year out. 

Also, the controversial $10,000 limit on the federal deduction for state and local taxes, tagged as SALT, has also remained the same since 2018. Although the Democrats have proposed an increase to $80,000 through 2030 as part of their spending package. 

Here is what Harris said, “It really does hammer lots of people depending on what state you live in.”

State Income Tax

It is possible for filers experiencing higher state tax burdens in states with no inflation adjustments for tax brackets, personal exemptions, or standard deductions. 

With 41 states and the District of Columbia tax wages, 23 places can be identified to have at least one significant unindexed tax provision, while 13 states don’t index any of these components. This is from a Tax Foundation analysis. 

The analysis argues that the actions of these places create an “unlegislated tax increase every year,” reducing wage growth and return on investment, especially during times of inflation.

Even though unchanged provision may affect some taxpayers; it’s difficult to estimate the damage without performing tax projection. Peoples’ returns have several other moving parts.