How Do Periods of High Inflation Impact Your Taxes

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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IMPORTANT DISCLOSURES: Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability. This material has been prepared for informational purposes only and should not be construed as personalized investment advice. Past performance may not be indicative of future results and does not guarantee future positive returns. For additional information about RGWM, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. Please read the disclosure brochures carefully before you invest or send money.

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