How High Inflation Affects Your Taxes
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Here's your Money Briefing for Monday, March 28th. I'm J.R. Whelan for The Wall Street Journal. Tax season is upon us, so all this week we've got a special series of episodes lined up. Our team of tax reporters will be tackling some big questions about how changes to tax laws and an uneven economy can make filing extra tricky this year. Today we kick things off by calling on tax reporter Richard Rubin to discuss how inflation affects your taxes.
One thing that will change is likely things like the standard deduction, because that also grows with inflation each year.
But there are also tax-related factors that won't change, and that can affect your finances anyway. Rich will take us through all of it after the break.
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Inflation running at near 8% is hitting you in your wallet every time you shop.
How does inflation influence which tax-code numbers get adjusted?
But how about your tax bill? With the tax filing deadline just around the corner, how will high inflation affect your return? WSJ tax reporter Richard Rubin has been looking into this and he joins us now. Rich, thank you very much for being with us.
Oh, sure. No problem.
So Rich, when Congress and the IRS determine how much tax people will wind up paying, does inflation factor into their decision making?
So yes, absolutely. Inflation is part of how a lot of numbers in the tax code get set. So Congress specifies which pieces of the tax code get adjusted for inflation and when and how. And then the IRS's job is to implement that.
All right, well, let's get into the specifics. One of the biggest things that affects how much you pay in taxes is the tax bracket you fall in. How have tax brackets changed for the 2021 tax season?
Well, for each year in the fall of 2020, they announced the 2021 tax brackets. In the fall of 2021, they announced the 2022 tax brackets. And those are based on A formula. They have a set of formulas they use to take the existing income thresholds for tax brackets and adjust them upward based on actual inflation in the economy. They went up a few percentage points. I would expect there to be a bigger jump in some of those tax brackets as we head into the 2023 tax brackets. You know, they're set based on roughly a sort of summer to summer calculation. And summer 20 to summer 2021 was not quite as big a jump as we'd expect from summer 21 to summer 22, based on what we know right now, halfway through that period.
So, Rich, how are people who are really feeling the pinch of inflation now, how will they see that in their taxes?
So they likely won't see it a lot in the tax returns that they're filing now in early 2022, even maybe beyond that into next year. But as we get into next year, one thing that will change is likely things like the standard deduction, because that also grows with inflation each year. And as do the tax brackets, as we've talked about. What will happen early 2023 is you may see some adjustment in paycheck withholding that adjusts for that. Those are automatic adjustments that happen, which means maybe less money coming out of your paycheck as the inflation adjustments kick in, even though that's going to be well before you start filing a tax return that has those higher tax brackets and higher standard deductions.
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