Could Inflation Lead to Higher Taxes?

David shares a stat from the US Labor Department: as of May 11th, inflation over the last 12 months through April of 2022 has been 8.3%.

David explains that the general belief is that inflation doesn't necessarily translate to more taxes because the IRS has been historically good at indexing tax brackets to keep up with inflation.

However, he says, there are a few thresholds in the IRS tax code that aren't indexed to keep up with inflation – and could result in you paying higher taxes.

Social Security, for instance, counts as provisional income. This represents a problem because as your Social Security rises to keep up with inflation, you get pushed closer to the provisional income thresholds. This may not seem like a big deal if inflation increases at the historical rate of 3%, but initial projections show that, in 2023, Social Security could go up to 8%.

Selling your primary residence is another area where inflation could cause you to pay more taxes. 

David explains that profits up to $250,000 – or $500,000 if you're married – from a sale of your primary residence are tax-free. However, since this number hasn't been adjusted to keep up with inflation since 1997, you run into the risk of your profit being subjected to capital gains tax if your home value increased as a result of inflation.

The Obamacare surcharge is another area where inflation can "hammer you", says David.

David discloses that inflation could force you to pay a double tax on the sale of a home.

The Salt Tax, a $10,000 limit on the Federal tax deduction, hasn't been changed since 2018. This means that if your income goes up, your state and local taxes rise commensurately – and a smaller and smaller percentage of that ends up being deductible on your Federal tax.

A "tax bracket creep" is when tax brackets fail to adjust for changes in consumer purchasing power due to inflation. 

Some experts, David shares, think that the adoption of the Modern Monetary Theory in the form of printing tons and tons of money would also cause a dramatic rise in taxes.

David believes that getting to the 0% tax bracket in retirement is the best way to shield yourself against all the taxes impacted by inflation.

 

 

Mentioned in this episode:

TaxFoundation.org

David's books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube