How High Inflation Could Boost Your Paycheck
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What is the main topic discussed in this episode?
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What tax changes are triggered by high inflation this year?
Here's your money briefing for Thursday, October 20th. I'm J.R. Whelan for The Wall Street Journal. Inflation is nearly three percentage points higher than where it was a year ago, but your paycheck may be about to catch a break. Inflation will trigger significant changes to the nation's tax laws that are likely to keep more money in your pocket.
Inflation has been high relative to history, and so the idea is to not have people have their taxes go up solely because of inflation.
But there are some pitfalls to watch out for, too. Coming up, we'll run the numbers with our tax reporter Richard Rubin. He'll tell us which areas of your finances are likely to get a little more breathing room. That's after the break.
Why does Congress tie tax brackets and the standard deduction to inflation?
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High inflation is triggering some pretty big changes to tax laws. This week, the IRS bumped up the nation's tax brackets by 7%, potentially putting a little extra money in your pocket. And there are plenty of other tax changes due to inflation that could affect your finances as well. WSJ reporter Richard Rubin is our go-to resource for understanding tax laws and policies and how they affect our wallets. And he joins me now. Rich, thanks very much for being with us. Yeah, thanks for having me. So Rich, there are a lot of moving parts here, so help us understand it. Why do some areas of tax laws fluctuate with the inflation rate?
Well, that was by design by Congress.
How will the IRS's 7% bracket and deduction adjustments affect take-home pay in January?
They wanted to prevent inflation from causing automatic tax increases. And so a lot of the key features in the tax code, the tax brackets, the standard deduction are tied to inflation. So every year the IRS, by law, looks at what inflation has been and then adjusts those provisions accordingly. In most years, especially most recent years where inflation has been relatively low, it's a few hundred dollars here, a few thousand there. It's not really a big jump, a couple percentage points. This year, there are some meaningful adjustments, and that's because of the inflation we've seen in the economy.
Okay, and so how will these adjustments show up in someone's take-home pay? And do we know how much that increase might be?
Yeah, I don't have any great figures on how much, but it would show up in take-home pay in January. So in January, these changes all go into effect for tax year 2023. And so in January... That's when the withholding tables change and paycheck withholding will adjust somewhat for this 7% increase in the standard deduction and where the brackets are. And thus, there'll be a corresponding change in how much taxes are taken out. So all else equal, your taxes would go down coming out of that paycheck. Now, it obviously will depend whether you're also getting a raise at that time too. And so... It's not a guarantee that your take-home pay will necessarily go up, but there will be an adjusted tax bite coming out of it.
So just to be clear, when will people have to think about accounting for these changes on their tax returns?
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:00–0:30
2
What tax changes are triggered by high inflation this year?
0:30–1:10
3
Why does Congress tie tax brackets and the standard deduction to inflation?
1:10–2:21
4
How will the IRS's 7% bracket and deduction adjustments affect take-home pay in January?
2:21–3:51
5
When will these inflation-driven tax changes show up on tax returns and estimated payments?
3:51–4:44
6
How does the standard deduction increase protect most taxpayers from higher taxes?
4:44–8:58
7
Which other personal finance items (FSAs, estate and gift taxes) are changing with inflation?
8:58–10:04
Speakers
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