The concept of annual inflation-adjusted financial thresholds is probably not new to many Americans. These include federal income tax brackets, 401(k) plan contribution caps, and cost-of-living adjustments for Social Security benefits, to mention a few.
These adjustments assist households in keeping up with the growing expense of living. Without changes, for instance, more households would eventually find themselves in higher tax brackets and Social Security recipients’ purchasing power would decline.
However, some limits are not updated for inflation, such as the federal minimum wage.
Senior vice president of the Bipartisan Policy Center Bill Hoagland stated that the determination of what is or is not inflation-indexed is primarily based on the whims of legislators when they drafted the relevant legislation. He answered, “It’s all over the map.”
Adjusting for inflation can be a “double-edged sword,” according to Moody’s Analytics chief economist Mark Zandi. The absence of such adjustment “could quickly become a financial problem” for households in periods of high inflation, such as in 2022, according to Zandi.
It would be more challenging, he continued, “to get inflation back in the bottle when everything takes off” if everything were indexed.
These are a few typical thresholds that are not adjusted for annual inflation.
Minimum Wage
Since 2009, the federal minimum wage of $7.25 per hour has not changed. The left-leaning Economic Policy Institute claims that’s the longest stretch in history without a raise from Congress.
An EPI analysis shows that, after taking into account the rising cost of living, the minimum wage has lost 29% of its value since 2009. The group discovered that its value has decreased more than it has since February 1956.
However, according to the Bureau of Labor Statistics, just 1.3% of all hourly workers in the United States (or over one million people) received pay that was equal to or less than the federal minimum in 2022. It stated that this is “much below” the 13.4% share from 1979.
The District of Columbia, along with thirty states, have raised the minimum wage for workers. Furthermore, the EPI indicates that 58 localities have increased their minimum above the state level.
According to the EPI, the minimum wage is adjusted for inflation in 19 states and the District of Columbia.
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Taxes on Social Security
Social Security payouts were first subject to federal taxes in 1984. Federal taxes are imposed on Social Security benefits when the income of the beneficiaries surpasses specific thresholds. Their benefits could be taxable up to 85%. (More information on this is provided below.)
The monetary thresholds have never been altered by Congress and are not inflation-adjusted. The Social Security Administration notes that as Americans’ benefits and other income have increased, so too has the percentage of recipients who are required to pay federal income tax on their benefits.
In 1984, less than ten percent of families had to pay federal income tax on their benefits.
The percentage has climbed dramatically: according to SSA estimates, approximately 40% of Social Security recipients are required to pay federal income taxes on their benefits.
To determine whether benefits are taxed, the federal government applies a certain income calculation. Adjusted gross income plus nontaxable interest plus half of your Social Security payments equals “combined income.”
If a married couple files jointly and their combined income is between $32,000 and $44,000, they will be subject to tax on up to 50% of their benefits. If income exceeds $44,000, up to 85% may be subject to taxation.
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Homeowners’ tax benefits
The first $750,000 of new mortgage debt is the maximum amount that can be deducted for house mortgage interest under a 2017 tax bill that was enacted by President Donald Trump. Prior to this, the cap was $1 million. (These two are not indexed to inflation.)
If Congress does not act, that ceiling will return to $1 million in 2026.
According to a recent Zillow analysis, there are now an unprecedented number of American communities where the “typical” home is valued at $1 million or more.
