“Adjusted for inflation” may sound like a throwaway phrase, but when you see it in action, it can change your perspective.
Take a few examples:
- Investment losses: Since 1978, taxpayers have been allowed to deduct up to $3,000 in investment losses against ordinary income. If that number had been adjusted for inflation, today’s deduction would be closer to $15,000.
- Home sale capital gains exclusion: Married couples can exclude up to $500,000 in gains (singles up to $250,000) on the sale of their primary home, a rule set in 1997. Adjusted for inflation, those numbers would be about $1,000,000 and $500,000
- Social Security benefits: On the other hand, Social Security has been inflation-adjusted since 1975. Back then, the average monthly benefit was $207. Today, it’s $1,976—showing how indexing can preserve value over time.
- Alternative Minimum Tax (AMT): First enacted in 1969 to target 155 wealthy taxpayers, it wasn’t initially indexed for inflation. By 2017, more than 2 million taxpayers were paying it, simply because the thresholds didn’t keep up with rising costs.
These examples show how powerful inflation adjustments can be—or how costly their absence may become. The next time you see (or don’t see) that phrase, pay attention. Whether a rule is indexed for inflation can make a significant difference in your financial picture.
Sources: Congress.gov, Nasdaq.com, TaxPolicyCenter.org