Soaring inflation was in the headlines again this month as the Consumer Price Index (CPI) hit a three-decade high in October, rising by 6.2% from a year ago. This represented the fastest 12-month inflation rise since 1990 and was the fifth straight month of inflation over 5%.
The CPI measures changes in price for a wide range of everyday items like food, clothing, shelter, healthcare, cars and utilities. So when inflation goes up, the purchasing power of your money goes down. Put another way, it costs more to go to the grocery store, fill up your gas tank or pay your electric bill when inflation is on the rise.
Bracket Creep is Coming
There are other effects of inflation that many people aren’t aware of, though. One of these is higher federal income tax brackets, otherwise known as “bracket creep.” When inflation pushes income into a higher tax bracket, the amount of income tax paid could increase with no corresponding increase in purchasing power.
The IRS recently announced that marginal income tax brackets and the standard deduction would both rise for tax year 2022. The marginal tax brackets for single filers next year will be as follows:
Taxable Income Amount of Tax Owed
|$0 to $10,275||10% of taxable income|
|$10,276 to $41,775||$1,027.50 + 12% of amount over $10,275|
|$41,776 to $89,075||$4,807.50 + 22% of amount over $41,775|
|$89,076 to $170,050||$15,213.50 + 24% of amount over $89,075|
|$170,051 to $215,950||$34,647.50 + 32% of amount over $170,050|
|$215,951 to $539,900||$49,335.50 + 35% of amount over $215,950|
|$539,901 or more||$162,718 + 37% of amount over $539,900|
The marginal income tax brackets for married couples filing jointly next year will be as follows:
Taxable Income Amount of Tax Owed
|$0 to $20,550||10% of taxable income|
|$20,551 to $83,550||$2,055 + 12% of amount over $20,550|
|$83,551 to $178,150||$9,615 + 22% of amount over $83,550|
|$178,151 to $340,100||$30,427 + 24% of amount over $178,150|
|$340,101 to $431,900||$69,295 + 32% of amount over $340,100|
|$431,901 to $647,850||$98,671 + 35% of amount over $431,900|
|$647,851 or more||$174,253.50 + 37% of amount over $647,850|
Tax Brackets Change but Rates Don’t
Note that tax rates haven’t changed — only the marginal income tax brackets. You will pay these amounts in federal tax next year on each portion of your income after you subtract any tax deductions and credits.
Meanwhile, the standard deduction will increase next year from $12,550 to $12,950 for single filers and heads of household and from $25,100 to $25,900 for married couples filing jointly. These amounts are increased by $1,400 if you’re over 65 years old and by $1,750 if you’re also unmarried and not a surviving spouse.
If you have lots of deductible expenses during the year, like charitable contributions and home mortgage interest, add these up to see if they are higher than the standard deduction. If they are, you might want to itemize deductions in order to lower your tax bill. If they aren’t, simply claim the standard deduction when you file your federal income tax return.
Social Security COLA Rises
There is a sliver of good news when it comes to rising inflation. Social Security payments are adjusted each year for inflation — this is referred to as a cost-of-living adjustment, or COLA. The Social Security Administration recently announced that the 2022 COLA will be 5.9%, which will be the largest annual increase in Social Security payments in four decades.
Give us a call if you have questions about changing income tax brackets, cost-of-living adjustments or any other aspect of your personal finances.