To fight bracket creep
The tax code is adjusting
To higher thresholds

This year has been a study in the systemic impacts of inflation.

Employment numbers have been strong all year while supply chain disruptions have resulted in a dearth of goods on shelves. Earned income in the absence of stuff to buy leads to price increases.

As prices increase, wages must keep up for employers to retain their staff. The strong labor market means that employers need to compete with other companies hiring from the same labor pool. A higher wage means a better chance of landing the employee you want.

Higher wages then lead to more money in circulation, meaning more money to buy stuff. But the stuff still isn’t on the shelves, so prices continue rising. This means that higher wages only help you tread water, at best, in a rising price environment.

This problem is taking longer to solve than anyone would like. It is contributing to the historically high levels of pessimism Americans feel towards our institutions.

However, there are reasons to be optimistic, or at least grateful, for the systems we have in place regarding fiscal policy. This brings us to everyone’s favorite bugaboo: taxes.

No one enjoys paying taxes. People will literally risk their freedom to evade their tax responsibility. Taxes are grouped in with the grave as the only certainties in life.

But this week, the tax code gave us all a reason to smile. Or at least kvetch less.

Our tax brackets correspond to income thresholds. In 2022, for example, this first $20,550 of taxable ordinary income is taxed at 10% in a household filing as “Married Filing Jointly.” Many retirees living off of social security, pensions, and systematic portfolio withdrawals may find themselves with a top marginal bracket of 12% to 22%.

In 2022, the most income a married household can earn and still be in the 12% bracket is $83,550. For the 22% bracket it is $178,150.

Retirees have other tax concerns on top of their ordinary brackets. People paying premiums for Medicare Part B and D need to be mindful of IRMAA surcharges (Income Related Monthly Adjustment Amounts). These are extra monthly premiums that increase progressively for people with Modified Adjusted Gross Income from 2020 in excess of $182,000.

Compounding this problem is the reduced opportunities for deductions faced by many people in retirement. For many people, being retired means no longer running a business, raising children, traveling for work, or contributing to a 401(k), or engaging in the activities that generally either produce deductions or credits.

If prices are increasing as they are now, a retiree may be required to increase retirement income to pay the same bills that were 8-10% less expensive last year. More income without deductions or credits means higher taxes, right?

Maybe not.

The phenomenon of “bracket creep” would impact millions of Americans next year. Bracket creep happens when income must increase to keep pace with prices. If the thresholds between tax brackets didn’t increase along with inflation, people might find themselves being pushed by forces out of their control into a higher tax bracket. In addition, they might be exposed to IRMAA surcharges, Net Investment Income Tax, and Additional Medicare Tax.

But the tax code is inflating too, in a good way.

As it does every year, this week the IRS announced the tax bracket thresholds for next year. Remember that top threshold for 10% tax for married filers? For 2022 it is $20,550. For 2023 it is $22,000. The top threshold for the 22% bracket is going from $178,150 to $190,750. These numbers will apply to income generated in 2023 and will be used on the returns people file in 2024.

In all, there are 62 tax provisions that are inflating based on the Consumer Price Index. This includes increases to major items that pertain to millions of taxpayers – such as the Standard Deduction – to changes to obscura like the Tax on Arrow Shafts. (Yes, this is a real thing.)

Since this happens every year, the inflating bracket thresholds may fly under the radar as the normal course of fiscal policy and nothing worthy of our attention.

However, watching the tax code systematically adapt to our difficult economic environment in a way that is beneficial to the general taxpaying population is a good reason to be grateful for at least part of our financial system. Taxes hurt, but if you know the rules, follow them, and take advantage of the opportunities available to you, taxes won’t kick you while you’re down.

If you need help getting taxes under control or learning about what opportunities may exist in the tax code to help reduce your annual tax burden, we’d love to talk with you.