Every year, the IRS adjusts many provisions to account for the impact of inflation, ranging from individual tax brackets to how much you can save in your individual retirement account, or IRA. With inflation running near a 40-year high, experts say some major changes are likely to be in store for taxpayers.
The IRS makes these changes to avoid "bracket creep" from the rising cost of living, noted American Enterprise Institute's Kyle Pomerleau, an expert on taxes. Without such adjustments, workers who received pay increases to keep up with inflation would be bumped into higher tax brackets, even though their standard of living remained the same.
This year, taxpayers could see some of the biggest changes in decades due to the hottest inflation since the early 1980s, tax experts say. While the IRS will likely officially announce these changes in October or November, the tax agency relies on a formula, based on inflation data, for calculating the new tax brackets and other limits. Based on that formula, Pomerleau forecasts that many tax provisions will be adjusted upwards by about 7%.