Are Tax Brackets Adjusted for Inflation?

Each year, the Internal Revenue Service (IRS) of the United States alters tax rates to account for changes in the cost of living in order to compute federal tax due. Because the US economy experiences annual inflation, the IRS raises tax brackets.

Tax Brackets

Tax brackets are monetary amounts that stratify taxable income. Tax rates vary under the United States’ progressive tax system; tax brackets define the range of tax rates.

For example, if a single person makes $9,950 in taxable income in 2021, the federal income tax rate is 10%, resulting in a total tax of $995. However, if a person earns $36,900, they pay 10% on $9,950 and 12% on the rest $26,950, resulting in a $4,229 federal tax bill. The following are the federal income tax brackets for 2021:

Inflation Adjustments

To account for increases in the cost of living, the IRS adjusts the personal exemption, standard deduction, tax rates, and other tax credits each year. Even if tax rates in the United States stay constant, changes in tax brackets, deductions, and credits impact the effective tax rate incurred by individuals and companies.

The IRS revised all tax brackets across all filing statuses for tax year 2021, resulting in a change in the effective tax rate. For example, the 10% tax bracket threshold rose from $9,875 in 2020 to $9,950 in 2021, a 0.8% rise.

The table below shows the inflation adjustments for each tax rate from 2020 to 2021. The rise in bracket limits from 2020 to 2021 varied from 0.71% to 1.0%, with a 0.95% average increase.

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