Inflation, and the Federal Reserve’s efforts to fight it with higher interest rates, is going to change the math, too.
“Many businesses will face a double whammy of higher interest expense this year and perhaps not being able to fully deduct this interest. Companies may want to model out their situation now so they’re not surprised later,” he said.
Lisa Cappiello at EisnerAmper in New York said other taxes are going to be affected as well.
“Personal income tax, sales tax and corporate income taxes [will] fall due to decreased wages, less investment activity, reduced consumer spending and lower corporate profits,” said Cappiello, a director in the firm’s Personal Wealth Advisors Group. “As property prices and assessed values fall, property taxes may or may not be impacted.”
Property taxes could in fact come down, said another advisor.
“We saw tremendous growth in home values across the country over the last year, and that appears to be reversing quickly, so property taxes may be coming down from their recent highs,” said Erik Preus, Minneapolis-based head of investment solutions for Envestnet PMC. “Capital gains taxes are likely also to feel some downward pressure just given the market correction we’ve gone through.”
Amy Sewell, Dallas-based senior tax manager at Exencial Wealth Advisors, said some people might actually end up paying less in taxes. On the other hand, taxes could also make up a larger proportion of disposable income.
“In theory, a recession itself will not have a significant impact on income tax rates paid by most taxpayers,” she said. “If a taxpayer’s taxable income drops due to a recession, the taxpayer may fall into a lower tax bracket, paying less taxes. Also, tax brackets and many other thresholds are inflation-adjusted each year. Since the adjustments for 2022 won’t match the current pace of inflation, income taxes may be a bigger percentage of disposable income for many taxpayers.”
“There are some benefits during a recession,” Cappiello said, “including bargain-shopping opportunities, reduction in real estate prices and developing the skill of saving money.”
There’s also going to be an effect on real estate tax given the current rate of inflation, which hasn’t been seen in 40 years, said Craig Richards, managing director and director of tax services at Fiduciary Trust Company International.
“Increased interest rates meant to curb inflation could result in a fallout to real estate tax,” Richards said. “If real estate prices decrease, the amount of property taxes collected will decrease.” Regarding sales tax, “if consumer spending is reduced, so [is] the collection of sales tax.”