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Can I change the inflation rate?

Users can now make their own assumptions regarding inflation in Scenario Analysis

The very nature of tax planning years into the future requires some assumption for inflation, since marginal tax brackets go up each year. Holistiplan uses a 2% inflation assumption to increase marginal tax brackets, the standard deduction amounts, the foreign housing exclusion deduction amount, and a few other items.

However, Firm Admins may adjust the firm-wide inflation assumption, and any users may choose to enter their own inflation assumptions for an individual scenario in Scenario Analysis. Users with Firm Admin privileges can navigate to Settings > Features & Tools > Tax, and scroll down to the Default Inflation Percentage section seen below.



At the top of each scenario column in Scenario Analysis, there will be a row titled Inflation Assumption in which that percentage assumption can be changed on a per-scenario basis from whatever percentage default is set for your firm.

 

Holistiplan will inflate current brackets, deduction amounts, etc., at whatever rate users enter. Users should note, however, that Holistiplan has already entered the known bracket amounts for the current tax year, so selecting that year should bring up the exact bracket information, regardless of any entered inflation assumption. As we learn the exact bracket amounts for future years, we will do the same.

The Inflation Assumption values do not inflate any income entries, so users will not see higher wages, IRA distributions, Social Security, etc., as a result of adjusting the inflation assumption.

Even though the Social Security Cost of Living Adjustments (COLAs) are published each year, since Holistiplan does not know if a recipient received benefits the whole year, or in the same amount for the whole year (e.g., one spouse on a married filing joint tax return dies), we do not inflate this gross benefit amount.

The checkbox under the Inflation Assumption field will similarly inflate the MAGI (Modified Adjusted Gross Income) thresholds in the Tax Report and Range Calc, shown below. Remember that there are several calculations of MAGI, so MAGI amounts can differ based on the specific application to which they pertain.






By default, Holistiplan leaves this box unchecked, choosing not to inflate these values, as in some cases (like with Medicare MAGI), the consequences of being off by one dollar can be significant, as going over a Medicare income surcharge threshold by a single dollar triggers higher costs on a per-person/per-year basis. 

To learn more about the Medicare-related MAGI specifically, check out our article on how Holistiplan handles Medicare Part B/D IRMAA (Income-Related Monthly Adjustment Amounts).


This is a very conservative approach, however, and some users may feel comfortable entering some value for inflation rather than keeping those MAGI thresholds at current values years into the future.