How Higher Inflation Will Boost Your Bank Account in 2022
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Here's your money briefing for Monday, January 10th. I'm J.R. Whalen for The Wall Street Journal. Consumer prices are rising at rates not seen in 40 years, but there could also be some good news about inflation. For some, lower income taxes.
The government adjusted tax brackets so they move up slightly so that they are slightly more generous because they don't want people to pay taxes just on inflation.
So how much money is coming to your paycheck and what other areas of your personal finances stand to benefit? We'll check in with WSJ tax reporter Laura Saunders on that after the break.
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Every year, the government makes adjustments to the amount you're taxed on income based on inflation. And with inflation running at levels not seen in 40 years, bigger than normal adjustments are on the horizon, which could mean more money in your pocket.
What immediate effect will 2022 inflation adjustments have on take-home pay?
How much? Let's bring in WSJ tax reporter Laura Saunders to sort through all the tax talk. Laura, thanks so much for being with us.
Thanks for having me.
So, Laura, inflation ran up pretty quickly in 2021. It sounds like that's kept the number crunchers at the IRS and Congress pretty busy.
We don't know if inflation is going to keep rising or cool down, but what we do know is that the inflation adjustments in the tax code are very important. And the fact that some provisions are indexed for inflation and some are not creates real winners and losers.
Now, almost anybody who takes home a paycheck would go in the winners column. Can you explain what kind of a change they'll see?
Yeah, that will surprise people a little bit. Many people, when they get their first paychecks of 2022 for 2022, will see that there's a little bump up in their take-home pay. For an $80,000 a year worker, it might be about $5 per paycheck biweekly. For someone making $200,000, it might be about $28 biweekly.
Okay, not exactly a windfall, but we'll take it. Now, before you refer to inflation indexing, that sounds like technical talk from math majors, but it's allowing more money to wind up in people's bank accounts. Can you explain what that is?
Here's what's going on. The government adjusted tax brackets so they move up slightly so that they are slightly more generous because they don't want people to pay taxes just on inflation. And currently, for 2022, the tax brackets were increased by about 3% for each bracket. And last year, that was about 1% because inflation was so much lower.
Now, wait, the government is basing this on a factor of 3%? Laura, inflation is running a lot higher than 3%.
Well, yes, a whole lot higher. For the year ended in November, it was nearly 7%. That's the highest in 40 years. But what happened is that the government's inflation factor is designed to usually be lower than real inflation. The other thing is that they computed the numbers in August before some of the really high inflation numbers came in.
Okay, so you mentioned that people will see more money in their paycheck, but what do these changes mean for people who are having money taken out of their paycheck to go into retirement accounts like a 401k or an IRA?
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