Tax Inflation Adjustments

Each fall, the IRS makes annual inflation adjustments for dozens of tax provisions. These include income tax brackets and the standard deduction, which can help you save money when filing your federal taxes.

The IRS announced this week that it’s making annual inflation adjustments to more than 60 tax provisions for the 2024 filing season, which is what will be used to file taxes in April of next year. The adjustment amounts are based on the C-CPI-U and will affect everything from the tax brackets to the Earned Income Tax Credit. In particular, the IRS boosted the standard deduction amounts for all filing statuses and adjusted the alternative minimum tax exemption amount. It also raised the depreciation allowance for energy-efficient commercial buildings and increased several other specialty exclusions and deductions. The full list of adjustments can be found in IRS Revenue Procedure 2023-38.

Housing, food, and gasoline prices have skyrocketed in recent months. But for many Americans, those high prices won’t necessarily mean higher paychecks. In fact, some could end up saving money this year thanks to the IRS’ annual inflation adjustments. These tweaks are designed to prevent a phenomenon known as “bracket creep,” in which inflation pushes people into a higher income tax bracket even though their actual wages have not increased. These adjustments are based on the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U. The IRS also uses these changes to adjust the value of various deductions and credits.

This year’s adjustments, which are the largest in decades, should help many families save money when it comes time to file their taxes. The higher standard deduction thresholds should eliminate the need for some taxpayers to itemize deductions, which will cut down on paperwork and save time when filing. Inflation-based increases to the 401(k) and IRA contribution limits should also allow savers to put more pretax money toward their retirement.

Inflation Adjustments for Tax Brackets
Tax Inflation Adjustments 1

Inflation Adjustments for Tax Brackets

The adjustments, which affect returns filed for the 2025 tax year, are part of an annual ritual in which the IRS updates tax laws to reflect changes to the economy. But this year’s inflation adjustment is unusually large due to skyrocketing prices for things like food, gas, and housing. For many Americans, this will mean more of their taxable income is eligible for the lower tax rates in the higher-income brackets. The IRS shifted the margins between each tax bracket by about 7%. The IRS also increased the size of the standard deductions for each filing status, meaning more of your taxable income is eligible to be deducted from your return.

The income tax brackets themselves will not change next year, but the dollar thresholds where these rates apply will be boosted by about 7%. For example, the top federal income tax rate of 37 percent will apply to incomes of $578,125 or more for individuals (or $693,750 for married couples). That is up by nearly $40,000 compared to this year. But the IRS’ adjustments may not provide much relief to those whose wages have not kept up with the cost of living. Those who find themselves in the middle of the income tax brackets will still see their tax rates rise this year and those who earn a lot more than the top tax rate may be hit with a hefty bill. That’s why it’s important to understand what these adjustments are, how they work, and how they might affect your tax situation.

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