Due to inflation, your tax bill for 2022 may be larger: how to file a return correctly

Inflation drives up bills everywhere from your favorite grocery store to a car dealership. It could also reduce some key tax deductions and credits, reports Money Talks.

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Several seemingly simple federal income tax credits are not indexed for inflation (the amount of the deduction remains fixed). This means they don't automatically adjust every year or so to keep up with rising costs of living.

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Thus, these deductions and benefits become less valuable over time or become available to fewer people.

1. Social Security Income Tax Exemption

Many new retirees are shocked by the fact that their pension is taxed. But 100% of pension benefits are not taxed.

Income tax is levied from 0% to 85% of Social Security retiree benefits. The exact rate depends on the tax status of retirees and what the federal government calls them "total income."

For example, retirees who file a joint tax return and have a combined income of $32 to $000 must pay taxes on 44% of their Social Security benefits. Couples whose income exceeds $000 will have to pay taxes on 50% of their benefits.

But these income thresholds are not adjusted for inflation. This is a big problem for millions of pensioners. When Social Security benefits were first taxed in 1984, 10% of recipients were expected to pay taxes. However, since the thresholds have never been indexed for inflation, we have come to the conclusion that more than half of Social Security recipients must pay taxes on their benefits.

2. Mortgage interest deduction

The mortgage interest deduction is no longer as valuable as it once was. To be eligible for this tax credit, you must list your deductions on your itemized return in lieu of the standard deduction.

However, the Tax Cuts and Jobs Act of 2017 roughly doubled the standard deduction, making it a far more attractive option than itemization for most taxpayers.

For some taxpayers, it still makes sense to detail. But these people may be surprised when they calculate their mortgage interest deduction.

According to accounting firm Grant Thornton, the 2017 tax law limited the interest deduction on mortgage debt to $750, but did not index that cap to inflation.

The increase in home values ​​over the past few years likely means that a larger percentage of people are taking out mortgages that exceed this limit, which in turn means that some of their mortgage interest is no longer deductible.

3. Exemption from tax on net investment income

The Health Care and Education Reconciliation Act of 2010 introduced a new tax known as the Net Investment Income Tax, or NIIT, which went into effect in 2013. This is a 3,8% fee that applies to income such as:

• Interest income.
• Dividends.
• Capital gain.
• Income from rent and royalties.
• Unqualified annuities.

Many taxpayers are completely exempt from NIIT. In particular, the tax applies to people with a modified adjusted gross income that exceeds the following amounts:

• Marriage filing jointly: $250
• Separate filing by spouses: $125.
• Single serve: $200
• Head of family: $200.
• Widow or widower with dependent child: $250

But these income thresholds are not indexed for inflation. Thus, a growing number of Americans will end up paying NIIT as inflation causes income to rise in later years. In other words, a tax that looks like it's being applied to the "rich" now may hit the "middle class" later.

4. Additional Medicare Tax Exemption

Even if they didn't realize it, 2013 was a bad year for taxpayers. Not only did the tax on net investment income go into effect, but also the additional Medicare tax created by the Affordable Care Act of 2010.

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Taxpayers are required to pay this tax if their "salary, compensation, or self-employment income (together with his or her spouse's income when filing jointly) exceeds the threshold amount for that person's filing status," as the IRS says.

Income thresholds:

• Marriage filing jointly: $250
• Separate filing by spouses: $125.
• Single serve: $200
• Head of family: $200.
• Widow or widower with dependent child: $200

While these amounts may seem relatively high, they are not indexed for inflation. This means that over time more and more people will pay this tax.

5. Capital loss deduction

When your stocks drop—and this scenario could apply to millions of people in 2022—there is one positive side: you can sell badly losing stocks and claim a tax deduction for your net loss. But the deduction for loss of capital is rather negligible.

Until 1976, it cost up to $1000. A federal law passed that same year increased the maximum cost to $2000 in 1977 and to $3000 beginning in 1978.

Since the deduction is not indexed for inflation, its maximum value remains at $3000. This means that it has become much less valuable over the years. In fact, if it had been indexed in 1978, that tax deduction would be worth more than $14 today.

6. State and Local Tax Credit (SALT)

The Tax Cuts and Jobs Act of 2017 limited the amount of the state and local tax (SALT) deduction: the deduction is typically limited to $10 per tax return (or $000 per return for married individuals filing separately)—and these limits do not apply. indexed for inflation, according to accounting firm Grant Thornton.

High-income people living in high-tax states are likely to suffer as inflation reduces the value of this deduction, provided they itemize their tax deductions. The SALT deduction is only available to people who list their tax deductions by item and do not claim the standard deduction.

7. Capital gains deduction when selling a house

Current federal law allows those who sell their homes to exclude from their taxable income a significant portion of the profit (capital gain) they receive from the sale of the home: up to $250 for single applicants and $000 for married couples who file jointly.

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The capital gains exclusion is not an itemized deduction, so it is available to any taxpayer who qualifies for it. However, the exclusion limits are also not indexed to inflation, meaning that this tax credit becomes less valuable as inflation increases.

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