2 Homeowner Tax Deductions Hurt by Inflation

Unhappy couple preparing their taxes
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We all know that inflation leads to higher bills at our favorite grocery store or retailer. But it also can reduce the value of some tax deductions.

A couple of seemingly straightforward tax breaks are not indexed to inflation in any way, meaning they are not adjusted periodically to keep pace with inflation. So, these deductions become less valuable over time.

Key deductions doomed to suffer this fate include the following.

State and local tax (SALT) deduction

The cap on the state and local tax deduction — often called the SALT deduction — is not indexed for inflation. Under current federal tax law, it generally is worth up to $10,000 per tax return (or $5,000 per return for married individuals who file separately).

High-income earners who live in high-tax states are most likely to be hurt as inflation erodes the value of this deduction, provided that they itemize their tax deductions. (The SALT deduction is what’s known as an itemized deduction, meaning it’s only available to the minority of taxpayers who choose to itemize their deductions rather than taking the standard deduction.)

Capital gains exclusion for the sale of a home

Current federal law allows those who sell their homes to exempt from their federal taxes a substantial amount of the profits (capital gains) they earn on the sale of a home: up to $250,000 for single filers and $500,000 for married couples.

The capital gains exclusion is not an itemized deduction, so it’s available to any taxpayer who otherwise qualifies for it. However, the exclusion limits also are not indexed for inflation, meaning this tax break grows less valuable as the bite of inflation increases.

How to offset the sinking value of these deductions

When inflation strips the value away from key deductions, you can fight back by increasing other deductions that in some cases will more than offset any value you have lost.

For example, if you are eligible to open a health savings account, you can save hundreds or even thousands of dollars in taxes simply by contributing to your account.

If you are looking for an HSA provider, Money Talks News partner Lively and four other providers recently earned top marks for their services, as we reported in “The 5 Best Health Savings Account Plans of 2021.”

Increasing contributions to certain retirement savings plans also can lower your tax bill. You may not even be aware of all the breaks to which retirement savers are entitled, as we explain in “Most People Don’t Know This Retirement Tax Credit Exists.”

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