Blogs Derek's Tax Blog Hint of Inflation
One of the concerns that I have is that we will see a resurgence in inflation. Last month’s numbers show that there is some inflation. Much of our current economic woes started with the collapse of the national real estate market. As the market has declined, more and more homeowners have found themselves underwater. Although, no one is admitting it, inflation would be one way to bring those homeowners out of the red and give them positive equities in their homes. Some of that positive equity could be tapped to power increases consumer spending, especially on big ticket items like cars and home improvements.
While an argument could be made that some inflation is good for the economy, it doesn’t come without side effects. In the tax world the biggest impact comes from any rates, credits, or exemptions that are not indexed for inflation. Inflation is why there is so much concern about the alternative minimum tax. Even our relatively low inflation over the recent history has been enough to lift many people into the alternative minimum tax zone. With the exception of the annual gift tax exemption most of the figures in the estate and gift tax world are not indexed for inflation. That means that people without currently taxable estates will see their estates become taxable due to inflation without receiving any economic benefit.
The House members and Senators who will shortly be debating the future of the estate tax know this, but that doesn’t mean that they will index the new exemption amount or the brackets. That is one reason that it is important to have as high an exemption as possible.