Why the minimum wage and some tax breaks remain the same despite inflation

Many Americans are likely familiar with financial thresholds that are adjusted annually for inflation.

These include contribution limits for 401(k) plans, cost-of-living adjustments for Social Security benefits, and federal income tax limits, to name a few.

These changes help households keep up with rising costs of living.

For example, without adjustments over time, more households will typically move into higher tax brackets and the purchasing power of Social Security recipients will decline.

But some thresholds, such as the federal minimum wage, are not adjusted for inflation.

What is indexed for inflation and what is not depends largely on the whims of lawmakers when they crafted the law, said Bill Hoagland, senior vice president of the Bipartisan Policy Center. “It’s all over the map,” he said.

Adjusting inflation could be a “double-edged sword,” said Mark Zandi, chief economist at Moody’s Analytics.

In times of high inflation, like 2022, the lack of adjustments “can quickly become a financial problem” for households, Zandi said.

However, if everything were indexed, it would be harder to “put inflation back in the bottle when everything goes up,” he added.

Here are some general thresholds that are not subject to annual inflation adjustments.

The federal minimum wage, $7.25 an hour, has remained unchanged since 2009.

This is the longest period in history without a rise in Congress, according to the Economic Policy Institute, a left-leaning think tank.

The minimum wage has lost 29% of its value since 2009, after accounting for rising costs of living, according to EPI analysis. The group found that it was worth less than at any time since February 1956.

However, only 1.3% of all US hourly workers (about 1 million people in total) wages were paid In 2022, the rate will be at or below the federal minimum, according to the Bureau of Labor Statistics. That’s “significantly lower” than the 13.4% share in 1979, it said.

Thirty states plus the District of Columbia accepted higher minimum for workers. In addition, 58 settlements raised according to the EPI, their minimum is higher than their state’s.

According to EPI, the minimum wage is indexed to inflation in 19 states plus the District of Columbia.

The federal government began taxing Social Security benefits in 1984.

Social Security benefits are taxed at the federal level if beneficiaries’ income exceeds a certain dollar level. Up to 85% of their benefits may be taxable. (This is explained in more detail below.)

The dollar thresholds are not adjusted for inflation, and Congress has never changed them.

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However, as benefits and other income for Americans have increased, the share of beneficiaries who pay federal income taxes on their benefits has grown over time, according to the Social Security Administration.

In 1984, less than 10% of families paid federal income taxes on their benefits.

Share increased significantly: SSA estimates about 40% of people receiving Social Security must pay federal income taxes on their benefits.

The federal government uses a special income formula to determine whether benefits are taxable. This “combined income” formula is: adjusted gross income + tax-free interest + half of your Social Security benefit.

For example, single tax payers would pay tax up to 50% of their benefits if their gross income is between $25,000 and $34,000. Up to 85% may be taxed if income exceeds $34,000.

Spouses filing jointly will pay tax on up to 50% of their benefits if their combined income is between $32,000 and $44,000. Up to 85% may be taxed if income exceeds $44,000.

Americans generally must be “accredited” to invest in private companies and investments such as private equity and hedge funds.

To be eligible, households must meet certain requirements, such as a minimum net worth or annual income.

This is a consumer protection issue: thresholds goal to provide Buyers are financially sophisticated and may bear the risk of loss from private investments, according to the Securities and Exchange Commission.

Individuals can generally become accredited with an annual earned income of $200,000, or $300,000 for married couples. Individuals or couples can also qualify for the program with a total net worth of $1 million, not including the value of their primary residence.

However, these dollar thresholds have not changed since their inception in the early 1980s.

According to the SEC, in 1983, only 1.5 million households (1.8%) qualified as accredited investors.

More than 24 million households in the United States—about 18.5% of them— qualified in 2022the agency said in a December report.

Many common tax benefits, such as the standard deduction, are subject to annual adjustments for inflation.

But others don’t. One example is the mortgage interest tax deduction.

Tax law of 2017 signed by President Donald Trump. limited the deduction Mortgage interest on the first $750,000 of new mortgage debt. Previously, the limit was $1 million. (None of these tied to inflation.)

That threshold would return to $1 million in 2026 unless Congress acts.

According to a recent Zillow study, there are now a record number of cities in the United States where the “typical” home costs $1 million or more.

Some taxpayers must pay income taxes of 3.8% on their investment income.

This “net investment income tax”, also known as the Medicare income tax, usually used if modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married joint filers.

Tax mostly They are paid by high-income households intentionally, according to the Congressional Research Service.

However, because dollar thresholds are not indexed for inflation, “over time, more taxpayers become subject to the tax regardless of whether their real (inflation-adjusted) income has increased or increased significantly,” CRS writes.