Higher Inflation Could Lead to a Higher Paycheck
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Here's your money briefing for Monday, October 25th. I'm J.R. Whelan for The Wall Street Journal. That 2% raise you got this year might not be doing a lot to offset skyrocketing prices on basic expenses like food, gas, and clothing, but there could be some relief on the horizon. Higher inflation triggers some automatic adjustments in the nation's tax laws. That could mean a little more money in your paycheck.
These adjustments are designed so that as inflation happens, the tax system doesn't bite you more or less generally than it would have in the prior year.
Coming up, we'll talk to WSJ tax reporter Richard Rubin about when you're likely to see your check go up and how inflation triggers changes that affect other areas of your personal finances. That's after the break.
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Consumer prices began to rise around the end of last year when demand picked back up, and they haven't stopped.
What is the episode about and how does inflation relate to take-home pay?
That's left a lot of Americans having to stretch their paycheck. But higher inflation also triggers changes to the formulas in the nation's tax laws, and that could mean some relief for your wallet. WSJ tax reporter Richard Rubin has been running the numbers, and he's here to boil things down for us. Rich, thanks so much for coming on the show. Oh, happy to do it. So, Rich, this is kind of complex, so help us understand this. There are areas of the nation's tax laws that are designed to adjust based on the rate of inflation to help people out who are getting clobbered by higher prices. Who would benefit from that?
So a lot of the main features of the tax code that we think about all the time, the standard deduction, the tax brackets, those are tied to inflation. So every year the IRS looks at what consumer prices are, follows a formula set out in the law and raises those thresholds so that as your income rises, you don't get bumped into a higher bracket too soon and you can use the standard deduction to shield inflation. more of your income. So for most wage earners in most years, those basic features of the tax system are tied to inflation. So in this year, going into 2022, all those parameters will slide upward. What Congress is trying to do is to not have stealth tax increases, to sort of slide the tax code upward along with prices and wages.
And so These adjustments are designed so that as inflation happens, the tax system doesn't bite you more or less generally than it would have in the prior year. So it's it's designed to keep sort of keep the real status quo, even though the numbers might change.
OK, so how would that work out to a bump in someone's take home pay and how much would that increase be?
Right. So it really is going to depend on any individual situation what the increase will be. But what will happen is the IRS will update the withholding tables and then so will your employer. And so when you flip over from December to January, less money will come out for income taxes from your paycheck. that's designed in real terms to help cover the costs of higher prices and maybe you also have higher wages.
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