Tax Rules Not Impacted by Inflation

As wages pick up and the Federal Reserve tapers down (it buys fewer Treasuries), the rate of inflation has climbed to levels not seen in many years. The consumer price index was up 5.4% for the 12 months ending September 2021. A great number of tax rules are tied to inflation; the dollar amounts are adjusted annually. These are called COLAs, which means cost-of-living adjustments. In most cases, the IRS uses the Chained Consumer Price Index for Urban Consumers (Chained CPI) to make these adjustments. However, not everything changes; there are still many other tax rules that remain unchanged despite inflation. The following is a list of tax rules that are not adjusted for inflation. Some of the dollar amounts have been in the tax law for nearly 60 years.

1. Additional Medicare tax on earned income: The 0.9% tax applies to earnings of singles over $200,000 ($250,000 for joint filers; $125,000 for married persons filing separately).
2. Additional Medicare tax on net investment income: The 3.8% tax applies to the lesser of net investment income (NII) or MAGI over $200,000 ($250,000 for joint filers and qualifying widows/widowers; $125,000 for married persons filing separately).
3. Below-market loans: The imputed interest rules do not apply to “gift” loans up to $10,000, or up to $100,000 (such as for the purchase of a home) if the borrower’s investment income does not exceed $1,000.
4. Business cruises: The deduction of business meetings held on cruise ships outside the North American area is limited to $2,000.
5. Business gifts: The deduction is capped at $25 (a dollar limit that hasn’t changed since 1962).
6. Business travel receipts: No receipts are required for a travel expense (other than lodging) of less than $75.
7. Capital loss offset to ordinary income: Capital losses in excess of capital gains can offset up to $3,000 of ordinary income ($1,500 for married persons filing separately).
8. Casualty loss deduction: In figuring the deductible amount of a casualty loss, the loss for each such event must be reduced by $100. Note: The dollar floor is $500 for a net disaster loss (for non-itemizers as well as itemizers).
9. Charitable contribution substantiation rules: The dollar thresholds for certain types of substantiation are the same each year (e.g., donations of $250 or more require a written acknowledgment from the charity).
10. Coverdell education savings accounts: The maximum contribution is $2,000 annually per beneficiary, and the modified adjusted gross income (MAGI) limits for making a full contribution remain at $95,000 for singles and $120,000 for joint filers.
11. Driving for charity: If you use your car for charitable purposes, you can deduct your mileage at the rate of 14¢ per mile.
12. Education assistance: Employees are not taxed on employer-provided education assistance up to $5,250 annually, whether or not job related.
13. Educator deduction: Educators may deduct $250 as an adjustment to gross income.
14. Employee achievement and safety awards: Employers can deduct (and employees are not taxed on) awards up to $1,600 if made under a plan (qualified awards), or $400 for nonqualified awards.
15. Estimated tax penalty exception for high-income taxpayers: To avoid underpayment penalties, one exception is to pay 100% of the prior year’s taxes through withholding and estimated tax, but those who are high income must pay 110%. High income for this purpose means adjusted gross income of $150,000 ($75,000 if married filing separately).
16. Estimated tax penalty threshold: There’s no penalty for underpaying estimated taxes if the underpayment is no more than $1,000.
17. Foreign tax credit simplified reporting: The ability to claim the foreign tax credit without having to complete a separate form is limited to credit amounts of no more than $300 ($600 for joint filers).
18. Group-term life insurance: Employers can pay for coverage up to $50,000 without any tax to employees; coverage over this threshold is taxable.
19. Health savings accounts (HSA) catch-up contributions: Those age 55 and older by the end of the year may add an additional $1,000 to their annual HSA contributions.
20. Home sale exclusion: Gain on the sale of a principal residence is tax free up to $250,000; $500,000 for married persons filing jointly.
21. IRA catch-up contributions: Those age 50 and older by the end of the year may add an additional $1,000 to their annual IRA contributions if otherwise eligible to make such contributions.
22. IRA penalty exception for first–time homebuying expenses: The maximum distribution from IRAs that is free from the 10% early distribution penalty is $10,000.
23. Non-dealer sales of business property or realty: An interest charge is imposed on a tax-deferred payment from an installment sale for over $150,000 if installment obligations are over $5 million.
24. Olympic medals: The adjusted gross income limit for claiming the exclusion for these medals is limited to $1 million ($500,000 for married persons filing separately).
25. Performing artists: The conditions for such individuals working as employees to deduct job-related expenses as an adjustment to gross income includes having adjusted gross income from all sources (not just performing) of no more than $16,000. Note: There is a proposal in Congress that would change this limit.
26. Recovering attorney’s fees from the government: While the limit on an award of attorney’s fees may be adjusted annually, the ability to use this rule only applies to those with a net worth of no more than $2 million.
27. Repayments of certain taxed items: An itemized deduction can be claimed (“other” itemized deduction on Schedule A) for the repayment of more than $3,000 of income (or the repayment may qualify for a tax credit of previously paid taxes).
28. Rental losses: If you actively participate in a rental activity, you may deduct up to $25,000 in losses from the activity each year. This full loss allowance only applies if your adjusted gross income is no more than $100,000 (with special rules for married persons filing separately).
29. Retirement plan loans: The most a plan participant may borrow from a qualified retirement plan is $50,000. Note: There were special limits for COVID-19-related loans in 2020.
30. Retirement savers credit: The maximum amount of retirement plan and IRA contributions that can be taken into account in figuring the credit is capped at $2,000.
31. Section 1244 losses: Losses on certain small business stock can be treated as ordinary losses rather than capital losses up to $50,000 ($100,000 for joint filers).
32. Self-employment tax: No tax payment is required if net earnings from self-employment are not at least $400.
33. Student exchange program: If you host an exchange student in your home under an agreement with a charitable organization, you may deduct up to $50 per month as an itemized charitable contribution.
34. Student loan interest deduction: The maximum annual deduction is $2,500.
35. Tax tables: They can be used for figuring the income tax of individuals who have taxable income up to $100,000, regardless of filing status.

Conclusion

There have been proposals to make some of these rules adjustable according to inflation increases. So far, nothing has come of these proposals. We’ll be sure to inform you if anything changes.