Inflation and taxes: The good, the bad and the in-between

WE FEEL THE IMPACT OF INFLATION as consumers every day, but did you know that rising prices could also affect your tax picture? Inflation can be mixed news for taxpayers. For example, each year the IRS provides tax inflation adjustments, which could, in turn, lower your tax bill. On the other hand, your employer might raise your salary to lessen the impact of inflation, which could put you in a higher tax bracket. Inflation also decreases the purchasing power of your money. And with healthcare costs typically rising faster than inflation, the money you save in a tax-advantaged health savings account (HSA) might not go as far as you hope.

So during times of high inflation, your tax bill could go higher — or lower. For that reason, you may want to speak with your tax advisor regularly about how these forces could affect your tax picture and ways you might consider responding. A report from the Chief Investment Office’s National Wealth Strategies (NWS) team, “Inflation, Market Volatility and Interest Rates: Tax Consequences and Favored Planning Techniques,” could help guide that conversation. Below are some ways inflation can affect your tax picture and strategies for minimizing your tax bill.

IRS inflation adjustments may work in your favor

The good: Taxpayers should familiarize themselves with the inflation adjustments that the IRS generally makes each year. Those include changes to the income cut-offs for federal income tax brackets, the thresholds for determining capital gains tax rates, and the size of the standard deduction. (For 2025, the standard deduction and income level thresholds reflect, on average, a 2.8% increase, the smallest adjustment since 2021.) In addition, caps on IRA, 401(k) and HSA contributions are often raised, letting you stash more money away and providing potentially higher tax deductions. Combined, these adjustments mean that you may find yourself in a lower tax bracket — with a lower federal tax bill — even if you received a raise.

The bad: While these changes apply to your federal taxes, many states don’t adjust tax brackets, standard deductions or personal exemptions for inflation. Ask your tax advisor about your state and local tax provisions.

A strategy to consider: Following a year of high inflation, you may be able to realize more taxable income without moving into a higher tax bracket. For example, if you want to convert assets from a traditional IRA to a Roth IRA, you’ll owe federal taxes on any untaxed IRA contributions and gains when you convert. While a conversion might normally push you into a higher tax bracket, higher income cut-offs due to inflation could potentially keep that from happening.

When to talk to your advisor
The IRS typically announces adjustments to tax brackets, deductions and retirement contribution limits in November.

Inflation could prompt a Social Security increase

The good: Social Security benefits are adjusted as the costs of living increase. That means after periods of high inflation, you’ll have more money to offset rising costs. For 2025, Social Security payments will increase by 2.5%. In 2024 recipients received a 3.2% increase in benefits, which was down from an 8.7% increase in 2023 — the highest in 40 years. This inflation, or cost-of-living, adjustment is based on a comparison of prices during the July to September window compared with the prior year and therefore may not reflect the inflation consumers feel. While recent cost of living increases reflect slower price increases overall, some parts of the economy such as housing have experienced higher inflation than others.

The bad: An increase in Social Security benefits could bump you into a higher federal tax bracket. Also, the income thresholds at which Social Security benefits are subject to federal income taxes are not adjusted for inflation, so a greater portion of your benefits may be taxed.

If you’re working, inflation adjustments also mean more of your wages could be subject to Social Security taxes. Employees pay a 6.2% tax on wages up to the Social Security threshold. In 2024, the threshold was $168,600. It will rise to $176,100 in 2025, exposing an additional $7,500 in income to the tax. 

A strategy to consider: If you’ve experienced investment losses, you may be able to avoid having your increased Social Security benefits push you into a higher tax bracket. With a strategy known as tax-loss harvesting, you could sell those assets and potentially use those losses to offset up to $3,000 in ordinary income, such as Social Security payments. Your tax advisor can explain some important caveats to this approach.

When to talk to your advisor
The Social Security Administration typically announces cost-of-living adjustments for the following year in October.

Employers could increase wages to offset inflation

The good: When inflation goes up, some employers adjust wages to account for the higher cost of living. A higher salary could allow you to maintain your buying power.

The bad: For some high earners, more income could trigger additional taxes. For example, higher wages could push your income over the threshold for triggering the 3.8% net investment income tax, which is $250,000 for married couples who file jointly and $200,000 for single individuals. Moreover, wage income above $250,000 ($200,000 for singles) is subject to a Medicare surtax of 0.9%. Neither of the income cutoffs for the 3.8% net investment income tax and the Medicare surtax are adjusted for inflation. (Nor is the $500,000 exclusion for married couples who file jointly — $250,000 for single individuals — from gains on the sale of a primary residence.)

A strategy to consider: If your paycheck is bigger, take advantage of any inflation adjustments to the contribution limits for tax-advantaged savings accounts. With a workplace retirement plan, you may be able to save more of your salary pre-tax, which lowers your taxable income. If you have a high-deductible health insurance plan and qualify for an HSA, you can put aside more pre-tax funds in your HSA, which lets you withdraw funds tax-free for current and future qualified heath expenses.

When to talk to your advisor
The IRS typically announces HSA contribution limits in May.

No matter where you land after these inflation adjustments are factored into your tax situation, there may be opportunities for tax-efficiency. Read the full report for a more detailed explanation of these and other strategies. And keep in mind that taxes can quickly become complex, so be sure to speak with a tax advisor before making any decisions.