Inflation has been in the news a lot lately, as the prices of everything from hotel rooms to used cars and gas continue to rapidly rise.
But one less-discussed aspect of inflation is how it affects your state income tax bill. Some states, like the federal government, account for inflation in key tax rules to protect your hard-earned dollars, while other states don’t.
The result? If you live in a state that doesn’t account for inflation at tax time, it’s possible for your tax bill to increase even if your income itself does not increase. That leaves you with less income to spend after taxes — which is especially painful when prices are higher due to increased inflation like we’ve seen recently.
This situation is described in a recent Tax Foundation report, which goes on to examine the ways different states “index” certain aspects of their tax rules to account for inflation, including two tax breaks: standard deductions and personal deductions.
Following is a look at states that don’t index these tax breaks to inflation, and what that means for their residents.
What is a standard deduction?
As we explain in “7 Words Every Taxpayer Needs to Know,” a standard deduction is a flat amount that reduces your taxable income.
For example, if you’re eligible for the standard deduction on your federal income taxes for 2021 and your tax-filing status is single, you can claim a standard deduction of $12,550. That means Uncle Sam will not tax the first $12,550 of your income.
At the federal level, standard deductions are indexed to inflation. But many states haven’t chosen to do that, which means that over time, an increasingly larger portion of residents’ income is taxed. This effect hurts your wallet even more when high inflation also is eating into your purchasing power.
States that don’t index their standard deductions
Not all states make use of standard deductions. But among those that do, these states (as well as the District of Columbia) do not index theirs to account for inflation, according to the Tax Foundation analysis:
- New York
- North Carolina
- Washington, D.C.
What is a personal exemption?
Another way to reduce income taxes is by claiming a personal exemption — essentially, a dollar figure you can deduct from your taxable income as long as you are not considered a dependent of another taxpayer. In some cases, taxpayers might qualify for multiple personal exemptions, such as if they have dependents.
Some states also offer personal exemptions, but many don’t index them. As with standard deductions, this means less of your purchasing power is shielded from state income taxes over time.
States that don’t index their personal exemptions
Not all states offer personal exemptions. But among those that do, these states do not index theirs:
- New Hampshire
- New Jersey
- West Virginia