Are Tax Brackets Adjusted for Inflation?

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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:

2021 Federal Income Tax Brackets
Tax RateSingle FilersMarried Filing JointlyHeads of Household
10%up to $9,950up to $19,900up to $14,200
12%$9,951 to $40,525$19,901 to $81,050$14,201 to $54,200
22%$40,526 to $86,375$81,051 to $172,750$54,201 to $86,350
24%$86,376 to $164,925$172,751 to $329,850$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,901 to $209,400
35%$209,426 to $523,600$418,851 to $628,300$209,401 to $523,600
37%$523,601 and above$628,301and above$523,601and above

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.

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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.

Tax Bracket Increases From 2020 to 2021
Tax RateSingle FilersMarried Filing JointlyHeads of Household
10%0.76%0.76%0.71%
12%0.76% and 1.00%0.76% and 1.0%0.71% and 0.93%
22%1.00% and 0.99%1.00% and 0.99%0.93% and 0.99%
24%0.99% and 1.00%0.99% and 1.00%0.99% and 0.98%
32%1.00% and 1.00%1.00% and 1.00%0.98% and 0.99%
35%1.00% and 1.00%1.00% and 1.00%0.99% and 1.00%
37%1.00%1.00%1.00%

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