21 States The place Inflation Hits More durable at Tax Time
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Inflation has been on the news a lot lately as prices of everything from hotel rooms to used cars to gasoline continue to rise rapidly.
However, a less discussed aspect of inflation is how it affects your state income tax bill. Some states, like the federal government, incorporate inflation into key tax regulations to protect your hard-earned money, while other states don’t.
The result? If you live in a state that does not account for inflation at the time of taxation, it is possible that your tax bill could go up even if your income itself does not go up. That leaves you spending less after-tax income – which is especially painful when prices are higher due to increased inflation, as we saw recently.
This situation is described in a recent report by the Tax Foundation that examines how different states “index” certain aspects of their tax rules to account for inflation, including two tax breaks: standard deductions and personal deductions.
What follows is a look at countries that do not attach these tax breaks to inflation and what that means for their residents.
What is a standard print?
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As we explain in “7 Words Every Taxpayer Must Know”, a standard withholding is a lump sum that reduces your taxable income.
For example, if you’re eligible for the standard 2021 federal income tax deduction and your tax return status is Single, you can claim a standard deduction of $ 12,550. That means Uncle Sam won’t tax the first $ 12,550 of your income.
At the federal level, the standard deductions are indexed to inflation. But many states haven’t chosen to do this, which means that over time, an ever larger proportion of residents’ income will be taxed. This effect will damage your wallet even more if the high inflation also eats up your purchasing power.
States that do not index their standard deductions
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Not all states use standard deductions. But among those who do, these states (as well as the District of Columbia) are not indexing theirs to account for inflation, according to the Tax Foundation’s analysis:
- new York
- North Carolina
- Washington, DC
What is Personal Liberation?
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Another way to lower income tax is to apply for a personal exemption – essentially a dollar number that you can deduct from your taxable income as long as you are not considered dependent on another taxpayer. In some cases, taxpayers may be eligible for multiple personal exemptions, such as when they have dependents.
There are currently no personal exemptions for federal income taxes: these were suspended by the Tax Cuts and Jobs Act from 2017 to 2026. Before that, however, they were indexed to inflation.
Some states also offer personal exceptions, but many don’t index them. As with standard deductions, this means that over time, less purchasing power will be shielded from state income tax.
States that do not index their personal exceptions
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Not all states offer personal exemptions. But among those who do, these states do not index theirs:
- New Hampshire
- New Jersey
- West Virginia
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