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Many Americans may be familiar with financial thresholds that are adjusted annually for inflation.
These include 401(k) plan contribution limits, cost-of-living adjustments for Social Security benefits and federal income tax brackets, among others.
These adjustments help families keep up with the rising cost of living.
For example, without adjustments, more households typically move into higher tax brackets over time and the purchasing power of Social Security recipients declines.
But some thresholds, such as the federal minimum wage, are not adjusted for inflation.
Bill Hoglander, senior vice president at the Bipartisan Policy Center, said what is tied to inflation depends largely on what lawmakers have in mind when drafting their respective legislation. “It’s all over the map,” he said.
Mark Zandi, chief economist at Moody’s Analytics, said the inflation adjustment could be a “double-edged sword.”
Zandi said that in a period of high inflation like 2022, the lack of adjustment “could quickly become a financial problem for households.”
However, if everything is indexed, it will be more difficult “to get inflation back in the bottle when everything takes off,” he added.
Below are some common thresholds that do not require annual inflation adjustments.
minimum wage
The federal minimum wage — $7.25 an hour — has remained unchanged since 2009.
The Economic Policy Institute, a left-leaning think tank, said this is the longest period in history that Congress has not increased funding.
The minimum wage is Lost 29% of value Taking into account the increase in the cost of living since 2009, according to EPI analysis. The group found its value to be lower than at any time since February 1956.
That’s only 1.3% of all hourly workers in the U.S. (about 1 million people in total) Salary paid By 2022, that number will be at or below the federal minimum, according to the U.S. Bureau of Labor Statistics. The report said the proportion was “well down” from 13.4% in 1979.
Thirty states plus the District of Columbia adopted Provide workers with a higher minimum wage. In addition, 58 regions Already proposed Their minimums are higher than their state’s minimums, according to EPI.
Minimum wages in 19 states, as well as Washington, D.C., are indexed to inflation, EPI said.
social security tax
The federal government began taxing Social Security benefits in 1984.
social security benefits Once a beneficiary’s income exceeds a certain dollar level, it is taxed at the federal level. Up to 85% of their benefits may be taxable. (This is explained in more detail below.)
The dollar threshold is not adjusted for inflation and has never been changed by Congress.
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However, as Americans’ benefits and other income have increased, the share of beneficiaries paying federal income taxes on their benefits has increased over time, according to the Social Security Administration.
In 1984, less than 10 percent of households paid federal income taxes on their benefits.
Significant share increase: SSA estimate About 40 percent of people who receive Social Security must pay federal income taxes on their benefits.
The federal government uses a specific income formula to measure whether benefits are taxable. The “consolidated income” formula is: adjusted gross income + non-taxable interest + half of Social Security benefits.
For example, a single taxpayer Will pay taxes If their total income is between $25,000 and $34,000, they can receive up to 50% in benefits. If you earn more than $34,000, you may be taxed up to 85%.
Married couples filing jointly will pay up to 50% tax on their benefits if their combined income is between $32,000 and $44,000. If you earn more than $44,000, you may be taxed up to 85%.
rich man’s investment
Americans usually have to “Gain recognition” for investing in private companies as well as investments such as private equity and hedge funds.
To qualify, families must meet certain requirements, such as a minimum net worth or annual income.
This is a consumer protection issue: Thresholds designed to ensure According to the SEC, the buyer is financially sound and able to withstand the risk of loss on a private investment.
Individuals generally have an annual income of $200,000 to obtain certification, and married couples can obtain certification with an annual income of $300,000. An individual or couple can also qualify with a total net worth of $1 million, excluding the value of their primary residence.
However, these dollar thresholds have not changed since their establishment in the early 1980s.
According to SEC data, in 1983, only 1.5 million households (1.8%) qualified as accredited investors.
More than 24 million U.S. households (approximately 18.5% of them) Qualify in 2022the agency said in a December report.
Homeowner tax breaks
Many common tax deductions, such as the standard deduction, are subject to annual inflation adjustments.
But others don’t. The tax deduction for home mortgage interest is one example.
The 2017 tax law signed by President Trump Limit deductions Home mortgage interest on the first $750,000 of new mortgage debt. The cap was previously $1 million. (None of these pinned inflation.
By 2026, if Congress takes no action, the threshold will revert to $1 million.
According to a recent Zillow study, the number of U.S. cities where the “typical” home is worth $1 million or more is now at a record high.
net investment income tax
Certain taxpayers must pay a 3.8% surtax on their investment income.
This “net investment income tax” is also called the Medicare surtax. Generally applicable Modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married joint filers.
The tax amount is most These costs are intentionally paid by higher-income households, according to the Congressional Research Service.
However, because the dollar threshold is not indexed to inflation, “over time, more and more taxpayers will be taxed regardless of whether their real (inflation-adjusted) income increases or increases significantly,” CRS wrote.
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