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Many Americans are probably familiar with financial thresholds that are adjusted each year for inflation.
These include contribution limits for 401(k) plans, cost of living adjustments for Social Security benefits, and federal income tax brackets, to name a few.
These optimizations help households keep up with the rising cost of living.
Without adjustments, for example, more households would generally move into higher tax brackets over time and the purchasing power of social security recipients would decline.
But some thresholds, like the federal minimum wage, are not adjusted for inflation.
What is indexed for inflation and what is not depends largely on the whims of lawmakers in crafting the relevant legislation, said Bill Hoagland, senior vice president of the Bipartisan Policy Center. “It’s all over the map,” he said.
Inflation adjustments can be a “double-edged sword,” said Mark Zandi, chief economist at Moody’s Analytics.
In times of high inflation, such as in 2022, the lack of adjustment could “quickly become a financial problem” for households, Zandi said.
However, if everything were indexed, it would be harder to “get inflation back in the bottle when everything gets going,” he added.
Here are some common thresholds at which there is no annual inflation adjustment.
minimum wage
The federal minimum wage — $7.25 an hour — has remained unchanged since 2009.
According to the Economic Policy Institute, a left-leaning think tank, this is the longest period in history without an increase from Congress.
According to an EPI analysis, the minimum wage has lost 29% of its value since 2009 when the rising cost of living is taken into account. It is worth less than at any time since February 1956, the group noted.
However, according to the Bureau of Labor Statistics, in 2022, only 1.3% of all U.S. hourly workers (about 1 million people in total) received wages at or below the federal minimum wage. This is “significantly below” the share of 13.4% in 1979, it said.
Thirty states and the District of Columbia have adopted higher minimum wages for workers. Additionally, 58 communities have raised their minimums above their state’s, according to EPI.
According to EPI, the minimum wage is indexed to inflation in 19 states plus DC.
Social Security Taxes
The federal government began taxing Social Security benefits in 1984.
Social Security benefits are taxed at the federal level once recipients’ income exceeds certain dollar levels. Up to 85% of your benefits may be taxable. (This is explained in more detail below.)
The dollar thresholds are not adjusted for inflation and Congress has never changed them.
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However, as Americans’ benefits and other income have increased, the share of beneficiaries who pay federal income tax on their benefits has increased over time, according to the Social Security Administration.
Less than 10% of families paid federal income tax on their benefits in 1984.
The share has grown significantly: The SSA estimates that about 40% of people who receive Social Security pay federal income taxes on their benefits.
The federal government uses a special income formula to assess whether benefits are taxable. This “combined income formula” is: adjusted gross income + nontaxable interest + half of your Social Security benefits.
For example, individual taxpayers would be taxed on up to 50% of their benefits if their total income is between $25,000 and $34,000. Up to 85% may be taxable if income exceeds $34,000.
Married couples filing jointly would be taxed on up to 50% of their benefits if their combined income is between $32,000 and $44,000. Up to 85% may be taxable if income exceeds $44,000.
Investments for the wealthy
Americans generally must be “accredited” to invest in private companies and investments such as private equity and hedge funds.
To qualify, households must meet certain requirements, such as a minimum net worth or annual income.
It’s a consumer protection issue: The thresholds are intended to ensure that buyers are financially sophisticated and can bear the risk of loss from private investments, according to the Securities and Exchange Commission.
Individuals can generally be accredited if they have an annual earned income of $200,000, or $300,000 for married couples. Individuals or couples can also qualify with a total net worth of $1 million, not including the value of their primary residence.
However, these dollar thresholds have not changed since they were introduced in the early 1980s.
According to SEC data, only 1.5 million households – 1.8% – qualified as accredited investors in 1983.
More than 24 million U.S. households — about 18.5% of them — will qualify in 2022, the agency said in a December report.
Tax deductions for homeowners
Many common tax reliefs, such as: B. the standard deduction, receive an annual inflation adjustment.
But others don’t. An example of this is the mortgage interest tax deduction.
A 2017 tax law signed by President Trump limited the mortgage interest deduction to the first $750,000 of new mortgage debt. Previously the cap was $1 million. (None of these are linked to inflation.)
In 2026, that threshold will revert to $1 million without congressional action.
According to a recent Zillow study, there are now a record number of U.S. cities where the “typical” home is worth $1 million or more.
Net capital gains tax
Certain taxpayers must pay a 3.8% surcharge on their capital gains.
This “net capital gains tax,” also called the Medicare supplemental tax, generally applies when modified adjusted gross income exceeds $200,000 for single taxpayers or $250,000 for married taxpayers.
According to the Congressional Research Service, the tax is paid primarily by high-income households.
But because the dollar limits are not tied to inflation, “over time, more and more taxpayers will be subject to the tax, regardless of whether their real (inflation-adjusted) income has increased or increased significantly,” CRS wrote.
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2024-05-31 13:43:23
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