Tuesday, October 4, 2022
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Inflation can save you money on your taxes

“If it didn’t fit, they were like, ‘What the hell happened on my tax return?'” he said. “That’s a huge tax increase.”

To avoid gradual increases in brackets, the government began adjusting, or indexing, tax brackets for inflation in the early 1980safter a long period of strong inflation.

Daniel T. Massey, principal of the Walz Group, an accounting firm in Lititz, Pa., said people whose incomes have kept pace with inflation will see no change in their tax bracket, while someone with stagnant or fixed incomes might have a lower tax bill due to adjustments for inflation.

Mr. Massey gave this example: A single taxpayer in 2021 who earned $100,000 and took the standard deduction would have paid $15,009 in taxes, for an effective tax rate of 15 percent. Under the projected brackets for 2023, a taxpayer with the same income would pay $14,383, a savings of $626, for an effective rate of 14.4 percent.

The standard deduction, which reduces your taxable income without needing to itemize, is expected to increase to $13,850 next year from $12,950 this year for singles and $27,700 from $25,900 for couples.

Here are some questions and answers about income tax inflation adjustments:

Next year, you’ll be able to contribute an estimated $6,500 to an individual retirement account, up from $6,000 this year. The limits are $1,000 higher if you are over 50; this “recovery” amount is not indexed for inflation, but would be under pending legislation in Congress known as Security Act 2.0. (Adjustments for workplace 401(k) accounts are calculated differently, based on data that will be available next month, Pomerleau said.)

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