Inflation essentially causes the value of these non-adjusted items to diminish. That decrease in value accumulates over time and grows more rapidly in times of rising inflation. That’s why some might again refer to these as stealth tax hikes.
Take your Social Security benefits. For decades, the income thresholds at which Social Security benefits start getting taxed have stayed at $32,000 for married couples filing a joint return and $25,000 for single filers. These income thresholds don’t go up with inflation, despite the fact that Social Security benefits rise each year and people are generally earning more money than they did in the past. As a result, more cumulative Social Security benefits will be taxed in 2022 than in 2021, in 2023 than in 2022, and so forth.
Other key tax breaks also aren’t adjusted for inflation annually.
For instance, many homeowners are aware of the general tax rule for home sales. If you have owned and lived in your main home for at least two out of five years leading up to the sale, up to $250,000 ($500,000 for couples filing a joint tax return) of your gain is tax-free, with any excess taxed at long-term capital gains tax rates. These $250,000 and $500,000 amounts might seem high, but they’ve never been adjusted for the appreciation in residential real estate during the 25 years this popular tax break has been in effect.
Two Obamacare surtaxes on upper-income individuals aren’t adjusted for inflation, either.
The 3.8 percent surtax on net investment income, such as dividends, rents, interest and capital gains, applies to single filers with modified adjusted gross incomes above $200,000 and to joint filers with modified AGIs over $250,000. Modified AGI for this purpose is AGI plus tax-free foreign earned income.
The 0.9 percent additional Medicare surtax on earned income, such as employee wages and self-employment income, kicks in for single filers with earned incomes over $200,000 and for joint filers with earned incomes above $250,000.
The $200,000 and $250,000 income thresholds for both of these surtaxes have remained stagnant since the surtaxes first took effect in 2013, despite the growth in wages and incomes over the past decade.
(Joy Taylor is editor of The Kiplinger Tax Letter. For more on this and similar money topics, visit Kiplinger.com.)
