As the cost of living in the United States rises, millions of Americans may face higher taxes on top of rising inflation.
According to a recent CBS article, “the current value of the U.S. minimum wage in real dollars is at its lowest level since February 1956, when the base U.S. wage was 75 cents (or $7.19 in June 2022 dollars).”
As previously stated, inflation could result in higher tax bills next year. The Internal Revenue Service (IRS) reviews its tax code annually and makes any necessary changes.
Americans will benefit from increased federal income tax brackets, changes to 401(k) plan contribution limits, and other changes in 2022.
However, the provisions that have not been adjusted for inflation may cause problems for some filers in the future.
If a single taxpayer meets the requirements for ownership and use, they can deduct up to $250,000 in profit from capital gains taxes, while joint filers can deduct up to $500,000 in profit from these taxes.
However, even though the median price of a home has increased by more than three times in the past 20 years, these figures have not changed at all since 1997.
According to CNBC, retirees and homeowners of all income levels may be the hardest hit. In a recent article, the outlet stated:
…some seniors may feel the pinch during tax season because the limits for levies on Social Security benefits have remained unchanged for decades.
Currently, up to 85 per cent of adjusted gross income, levy-free interest, and one-half of Social Security benefits may be taxable if they exceed $34,000 for single filers and $44,000 for married couples filing jointly.
Following last year’s record-breaking 5.9 per cent cost-of-living increase, Social Security recipients are set to receive an estimated 10.5 per cent increase in 2023.
According to CNBC, this would amount to an additional $175.10 per month per household and could have an impact when tax filing season comes around again.
Joint filers can deduct up to $500,000 in profit from capital gains taxes, while single sellers can deduct up to $250,000 if they meet the ownership and use tests.
However, despite median home sales prices more than doubling in the last 20 years, these figures have remained unchanged since 1997.
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According to Leonard Burman, Urban Institute fellow and co-founder of the Tax Policy Center, these fixed limits are intentional:
“I believe the intention was for the exemption level to lose value over time.” Essentially, it’s a method of phasing in a tax increase or, at the very least, limiting the revenue costs.”
Because the IRS has not yet made its 2023 tax code changes, retirees and homeowners may or may not see higher taxes in the coming year or two.
