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New Inflation Adjustments Proposed For Some Tax Rules



New Inflation Adjustments Proposed for Some Tax Rules

On July 21, Senator Grassley introduced S. 4589, Middle-Class Savings and Investment Act. It aims to add a few inflation adjustments to dollar amounts in the tax law that are not adjusted for inflation. The ones selected seem aimed at low to middle income taxpayers. These adjustments would be for:

1. $2,000 child tax credit

2. $500 other dependent credit

3. Education costs in the American Opportunity Tax Credit and Lifetime Learning Credit (currently, only the income thresholds for inflation are adjusted for inflation).

4. Student loan interest deduction.

He would pay for this by extending the $10,000 SALT cap for one more year (through 2026).

See Senator Grassley’s press release about the bill.

I think there is merit in adjusting the child and dependent credits for inflation. After all, the personal exemption (returning in 2026 with the child credit going back to $1,000) was adjusted for inflation.

I can see some logic for the education credit and student loan deduction, but these provisions already have flaws and need greater improvements and perhaps even removal from the tax law since there are non-tax laws to help low-income individuals attend college. The AOTC provides tax breaks to many individuals with income too high to qualify for a needs based scholarship. Why not use those funds to provide larger Pell grants? And these credits do cause universities to justify increased tuition (the inflation adjustments to the credit calculation would likely do the same).  And student debt has problems outside of the tax law (I highly recommend The Debt Trap by WSJ reporter Josh Mitchell).

There are numerous dollar amounts in the federal tax law that are not adjusted for inflation, such as the $3,000 capital loss limitation and the $200K and $250K thresholds for the net investment income tax (NIIT). Good for Senator Grassley in not adjusting ones that are not applicable to low to middle income taxpayers.

One that seems appropriate for his bill though is are the taxability thresholds at section 86 to determine how much Social Security might be subject to tax. That affects middle class individuals receiving Social Security benefits.

I think this topic is one warranting greater discussion in Congress as part of other needed reforms, such as whether the advanceable, fully refundable child tax credit we had for 2021 should return. That is known to have provided help to many families with income below $150,000.

What do you think? Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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