Since inflation began to surge in early 2021, several key tax parameters indexed to inflation have increased as well. These provisions helped to protect households’ real, after-tax income. But not all elements of the Internal Revenue Code (IRC) are indexed to inflation. These omissions can cost tax payers dearly.

Many IRC stipulations are indexed to inflation. For example, personal income tax brackets are adjusted each year. This prevents taxpayers from slipping into a higher tax bracket simply because their nominal (versus real) income has increased. In 2018, the 32 percent bracket for married filing jointly (MFJ) taxpayers began at taxable income of $315,000. That floor has increased each year and now stands at $364,200. Similarly, the maximum employee contribution to 401(k) plans has risen from $18,500 in 2018 to $22,500 in 2023. The standard deduction has increased from $24,000 to $27,700 over the same period.

Yet many tax thresholds are not tied to inflation. The treatment of realized capital gains stands out. A stock position purchased for $10,000 on January 1, 2003 with share price appreciation of 9.0 percent per year would have generated a long term capital gain tax of $6,907 had it been sold 20 years later, at the end of December 2022.1 However, had the taxpayer’s $10,000 cost basis been adjusted by the CPI, the tax would have been only $5,957.2 The limit for capital losses that can be used to offset ordinary income has been $3,000 per year since 1978, which is less than $700 in today’s dollars.

Other unindexed tax measures include the child tax credit, which has lost about 15 percent of its value since 2018, and the net investment income tax (NIIT). The NIIT is a 3.8 percent surcharge on investment income, which for joint filers applies to taxable income over $250,000. This fixed threshold will ensnare more taxpayers as inflation continues.

These are but a few examples of inconsistent policies regarding inflation. The need for prudent tax planning will only increase as inflation marches on.

Also In This Issue

Minimizing The Capital Gains Tax On Sale Of Your Home
Commercial Real Estate And Your Portfolio: A Review Of REITs
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles