QUESTION:
How does inflation impact your tax bill?
ANSWER:
Some tax provisions are indexed for inflation. Tax brackets, standard deduction amounts, and income caps on IRA contributions are adjusted yearly based on the prior year’s inflation calculations.
But two bigger tax areas that aren’t adjusted are the taxation of Social Security benefits and the home-sale exclusion. Income thresholds at which Social Security benefits are taxed have stayed static for decades despite benefits having gone up. As a result, more cumulative Social Security benefits will be taxed this year.
The home-sale exclusion has remained unchanged since 1997. Selling your home can provide a sizable tax break, but it’s never been adjusted for the appreciation in residential real estate.