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Why the Minimum Wage and Some Tax Breaks Remain Unchanged Despite Inflation

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Many Americans are likely familiar with the concept of financial thresholds that are adjusted for inflation each year to help households keep pace with the rising cost of living. These adjustments include contribution limits to 401(k) plans, cost-of-living adjustments for Social Security benefits, and federal income tax brackets, among others. However, not all financial thresholds are inflation-adjusted, such as the federal minimum wage, which has remained unchanged at $7.25 an hour since 2009, making it worth less than at any point since February 1956.

When it comes to Social Security taxes, the dollar thresholds for taxing benefits are not inflation-adjusted by Congress, leading to more beneficiaries paying federal income taxes on their benefits over time. Additionally, the thresholds for becoming an accredited investor to invest in private companies have not changed since the early 1980s, leading to a significant increase in the number of households qualifying as accredited investors over the years.

Certain tax deductions, like the standard deduction, receive annual inflation adjustments, while others, such as the deduction for home mortgage interest, do not. The 2017 tax law signed by President Donald Trump limited the deduction for home mortgage interest to the first $750,000 of new mortgage debt, with the threshold set to revert to $1 million in 2026. Additionally, some taxpayers must pay a 3.8% surtax on their investment income if their modified adjusted gross income exceeds certain dollar levels, which are not inflation-indexed.

Inflation adjustments can be a double-edged sword, with some arguing that it can help households during times of high inflation but make it difficult to control inflation if everything were indexed. The lack of adjustments to certain financial thresholds can create financial problems for households over time, highlighting the importance of regularly reviewing and updating these thresholds to reflect the changing economic landscape. Lawmakers’ decisions on what is and isn’t inflation-indexed play a significant role in determining the financial impact on individuals and households.

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