Tax refunds may be lower this year and inflation is making prices go up more and more. Therefore, not only will you collect less money for your tax refund check in 2023, but you will also have lower purchasing power. The U.S. citizens that compare this year’s bill with those years before inflation skyrocketed can tell how expensive inflation is.
Apart from paying for higher services and bills, taxpayers see how inflation is affecting some deductions they get on taxes as well as other exemptions. If those tax exemptions or reductions are not updated to the new cost of living, they are not as valuable as they used to be. There are several income tax breaks from the Federal government that do not get any adjustment. So, it makes tax refunds lose value.
Which tax breaks have not been updated to get a higher tax refund?
One of the things that have affected the most to U.S citizens is the price of their mortgages. Many people saw that they had to pay a lot more for mortgages after the interest rates went up to tackle inflation. Some homebuyers have thought about getting rid of their mortgage. Paying it off with the help of their savings or even with their tax refunds if their debt was not that high.
The deduction that came into effect through the Tax Cuts and Jobs Act of 2017 was not linked to inflation. Besides, you could only benefit from a tax deduction if you have a mortgage debt of up to 750,000 dollars. As many mortgages are much more than that amount nowadays, you might not get a deduction.
What about the Medicare tax exemption?
Some taxpayers may have to pay this tax if their income exceeds the threshold limits. As these thresholds do not go up with inflation, but salaries increase, there are more people who end up paying this tax. Therefore, they also receive a lower tax refund since they have to pay that Medicare tax. Going back to the housing market, those who sell a house may also get less in their tax refunds.
It is true that those who decide to sell their home can get an exclusion from their taxable income. So as to avoid taxes, there is a limit to the earnings on the house sale. It could be worth up to 250,000 dollars for those who file as an individual. Those couples who file jointly have a higher limit of up to 500,000 dollars. Once more, prices go up but not thresholds,s o you end up getting less for your tax refund.
The State and local tax deduction is not indexed either, therefore, it becomes less relevant and does not boost your tax refund. These are just a few examples, but there are a few more that may affect investors.