How Inflation Could Affect Your Tax Bill This Year | Expert Tax Insights from Elite Consulting P.C.
How Inflation Could Affect Your Tax Bill This Year?
Inflation has been a hot topic lately, affecting everything from groceries to gas prices. But did you know it could also impact your tax bill? As inflation rises, tax provisions tied to cost-of-living adjustments can change, potentially affecting how much you owe or how much you get back in refunds. Here’s what you need to know about how inflation could impact your taxes this year.
1. Tax Brackets Adjust for Inflation
The IRS adjusts tax brackets annually to account for inflation. If inflation rises significantly, the income thresholds for each tax bracket increase. This adjustment can help prevent "bracket creep," where inflation pushes you into a higher tax bracket even though your purchasing power hasn’t changed.
Example:
If the 22% tax bracket threshold rises from $89,075 to $95,375 for joint filers, and your income is $92,000, you’ll remain in the 22% bracket instead of being bumped into the 24% bracket.
2. Standard Deduction Increases
The standard deduction is also adjusted for inflation. For the 2023 tax year, the standard deduction rose to $13,850 for single filers and $27,700 for married couples filing jointly. A higher deduction means you’ll reduce your taxable income, potentially lowering your tax bill.
3. Tax Credits and Deductions
Inflation can affect key tax credits like the Earned Income Tax Credit (EITC), child tax credit, and retirement contribution limits. These credits and deductions usually increase slightly each year, allowing eligible taxpayers to save more.
Important Tip:
Review these adjustments before filing to ensure you’re maximizing your eligible credits.
4. Capital Gains Taxes and Inflation
Capital gains taxes apply when you sell investments or real estate for a profit. However, the IRS doesn’t adjust the purchase price of these assets for inflation. This means that even if your asset’s value increased due to inflation, you could face a higher tax bill when selling it.
Example:
If you bought a property for $200,000 and sold it for $300,000 after 10 years, a large part of the $100,000 gain could be due to inflation. However, the entire amount could be subject to capital gains tax.
5. Retirement Contributions and Savings Plans
Inflation-adjusted contribution limits can help you save more in tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs). For example, in 2023, the 401(k) contribution limit rose to $22,500, with an additional $7,500 catch-up contribution allowed for those aged 50 and older.
6. Social Security Taxes and Benefits
Social Security benefits are indexed to inflation, meaning higher payments in retirement. However, as your income increases due to inflation, more of your Social Security benefits might become taxable, impacting your tax bill in retirement.
What You Can Do Now
- Check the Latest IRS Updates: Stay informed on annual inflation adjustments.
- Adjust Withholdings: Review your W-4 form to ensure your employer withholds the right amount of tax.
- Consult a Tax Professional: Tax rules are complex, especially when inflation impacts multiple areas of the tax code. A professional can help optimize your tax strategy.
Inflation affects more than just everyday expenses. With the right planning, you can mitigate its impact on your tax bill and make the most of inflation-related tax adjustments. Stay proactive and consult with a tax expert to ensure you’re prepared for tax season.