2 House owner Tax Deductions Harm by Inflation


We all know that inflation leads to higher bills at our favorite grocery store or retailer. But it can also reduce the value of some tax deductions.

Some seemingly straightforward tax breaks are not linked to inflation in any way, meaning they are not regularly adjusted to keep up with inflation. These prints lose value over time.

Among the main conclusions doomed to suffer this fate are the following.

State and Local Withholding Tax (SALT).

The cap on state and local tax deductions – often referred to as the SALT deduction – is not indexed to inflation. Under current federal tax law, it’s generally worth up to $10,000 per tax return (or $5,000 per tax return for married people filing separately).

High-income earners living in high-tax states are most likely to be hurt if inflation erodes the value of this deduction, provided they itemize their tax deductions. (The SALT deduction is what’s known as a single deduction, meaning it’s only available to a minority of taxpayers who choose to itemize their deductions rather than take the standard deduction.)

Exclusion of capital gains when selling a house

Current federal law allows those who sell their homes to exempt a significant portion of the gains (capital gains) they make on the sale of a home from their federal taxes: up to $250,000 for singles and $500,000 for married couples.

The capital gains exclusion is not an individual deduction, so it is available to any taxpayer who otherwise qualifies for it. However, the exclusion limits are also not indexed to inflation, which means that this tax benefit loses value as inflation increases.

How to compensate for the declining value of these deductions

When inflation erases important deductions, you can fight back by increasing other deductions, which in some cases more than offset the lost value.

For example, if you are eligible to open a health savings account, you can save hundreds or even thousands of dollars in taxes simply by funding your account.

If you’re looking for an HSA provider, Money Talks News partner Lively and four other providers recently received top marks for their services, as we reported in The 5 Best Health Savings Plans of 2021.

Increasing contributions to certain retirement plans can also reduce your tax burden. You may not even be aware of all the breaks that retirement savers are entitled to, as we explain in Most People Don’t Know This Retirement Tax Credit Exists.

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