Inflation May Save You Money on Your Taxes

“If it wasn’t adjusted, they would say, ‘What the heck happened on my tax return?’” he said. “That’s a big tax increase.”

To avoid bracket creep, the government began adjusting, or indexing, tax brackets for inflation in the early 1980s, after a long period of raging inflation.

Daniel T. Massey, a principal with Walz Group, an accounting firm in Lititz, Pa., said people whose income had kept pace with inflation would see no change in their tax bracket, while someone with a stagnant or fixed income might have a lower tax bill because of the inflation adjustments.

Mr. Massey gave this example: A single filer in 2021 who earned $100,000 and took the standard deduction would have paid $15,009 in taxes, for an effective tax rate of 15 percent. Under projected brackets for 2023, a taxpayer with the same income would pay $14,383 — a saving of $626 — for an effective rate of 14.4 percent.

The standard deduction, which reduces your taxable income without requiring that you itemize deductions, is expected to rise to $13,850 next year from $12,950 this year for single filers and to $27,700 from $25,900 for couples.

Here are some questions and answers about income tax inflation adjustments:

Next year, you’ll be able to contribute an estimated $6,500 to an individual retirement account, up from $6,000 this year. Limits are $1,000 higher if you’re over 50; this “catch-up” amount is not indexed to inflation, but would be under legislation pending in Congress known as Secure Act 2.0. (Adjustments for workplace 401(k) accounts are calculated differently, based on data that will become available next month, Mr. Pomerleau said).

Read More: Inflation May Save You Money on Your Taxes

2022-09-25 10:57:57

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