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Home›Indexation›Taxes and inflation: How will rising inflation affect your tax bill?

Taxes and inflation: How will rising inflation affect your tax bill?

By Ed Robertson
January 25, 2022
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AEverything indicates that the impact inflation will have on millions of Americans in 2022 will be huge, which could have been expected since the home stretch of 2021, when the consumer price index suffered a Increase of 6.8 in November and one 7% increase in December compared to the previous year.

What is the purpose of inflation?

Inflation in the country redistributes purchasing power from businesses and households to the federal government, although in return it reduces the purchasing power of people’s incomes and the value of fixed income assets.

Prior to the adoption of inflation indexing in 1981, the the level of inflation remained at 14.8%. With the change since that year, although taxpayers’ incomes have increased, the actual increases have not reflected this increase, resulting in higher taxes.

The tax increase in recent months is the highest on record since 1982, so consumer borrowing rates will also rise and a series of rate hikes this year to combat the rising cost of living, according to Federal Reserve Chairman Jerome Powell.

“It’s a hodgepodge of things that are being left out, and it’s not just hitting wealthy taxpayers,” certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, Carolina, told CNBC. North.

More profits, more taxes

Not all tax provisions have been indexed by Congress, adjusting only some, such as in the case of home buyers and sellers, which have not been adjusted for inflation.

Currently, filers who sell their principal residence can exclude up to $250,000 of the gain from capital gains tax ($500,000 for couples filing jointly).

Additionally, there is a limit of $750,000 on total mortgage debt for which interest is tax deductible.

However, if a taxpayer has large taxable gains from the sale of a highly valued home, he or she must also pay higher taxes in the face of inflation than a wage earner whose taxes have been adjusted for inflation each year.

Similar cases of increased taxes due to inflation are experienced by employees, retirement savers, tax-paying savers and welfare recipients.

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