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Inflation Adjustments – Background
Since the late 1980s, the U.S. Tax Code has required that federal income tax brackets be adjusted for inflation annually, and inflation adjustments have been inserted into the Internal Revenue Code in recent years with increasing frequency. For example, the Code now requires over 50 other inflation-driven computations to determine deduction, credit and exclusion amounts in addition to the more than 30 separate computations needed to inflation-adjust the tax bracket schedules each year. Estimates for any of the inflation-adjusted tax figures for 2021, of course, are also necessarily subject to any changes to the tax law that may be made by Congress over the course of the next year.
Projections based on the US Department of Labor’s inflation figures for the 12-month period between August 31, 2019, and August 31, 2020 suggest most taxpayers will experience a degree of inflation-driven “tax cut” savings, compared to 2020 tax filings. Here’s an example of how taxpayers will benefit in 2021 when compared to 2020 based on the inflation adjustments to the income tax brackets provided under the current tax code:
- Because of the income ranges bracketing, the inflation adjustments will provide an effective “tax cut” by taxing more income at lower marginal tax rates. A single filer with taxable income of $50,000 should owe $44 less next year due to the adjustments to the income tax rate brackets between 2020 and 2021
- A married couple filing jointly with a total taxable income of $130,000 should pay $88 less income taxes in 2021 than they will on the same income for 2020 because of indexing of their tax bracket for 2021