How Do Periods of High Inflation Impact Your Taxes
Understand The Effect That Inflation Has On Your Taxes
Inflation is ravaging America’s economy as well as household budgets. Thankfully, when it comes to federal income taxes, inflation has some positive impacts. That’s because the IRS makes annual adjustments to certain tax limits and phase-out ranges. When inflation is high, as it is now, those adjustments can effectively increase the value of some federal tax credits and deductions. An example of this is the income tax brackets themselves. While the percent tax rates do not change year over year, the amount of income that places you in each of those brackets is adjusted for inflation every year. So next year, you may feel like you received a bit of a tax break even if your taxable income essentially stays the same because you could end up in a lower tax bracket. If you are a person who collects social security, you could also see a significant increase in your monthly payment amount as these payments are adjusted for inflation annually. Other common tax return items that are adjusted for inflation are the following:
- IRA Contribution Limits
- 401(k) Contribution Limits
- Standard Deduction
- Income that falls in the 0% Capital Gains Tax Bracket
- Additional Medicare Tax and Net Investment Income Tax Income Threshold
So, while it hurts to see your household budget and spending power reduced by periods of high inflation, it is essential to recognize the positive impacts and take advantage of them. This will help slightly offset the adverse effects of high inflation.
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