A combination of rising wages and inflation is threatening to push some taxpayers into higher tax brackets this year, which means you could owe more to Uncle Sam come 2023’s filing season.

 

With inflation at its highest level in nearly 40 years—prices for consumer goods rose 6.8% in November 2021 compared to the same period a year ago—bigger paychecks landing in higher tax brackets could actually buy less. According to a survey by The Conference Board, US businesses plan to boost wages by 3.9% in 2022, the highest increase since 2008. This increase follows wages rising 4.3% in November 2021 due to pay increases by businesses seeking to attract and retain talent from the “Great Resignation” pool.

 

A pay raise can be enough to nudge a taxpayer into a higher tax bracket, explaining why inflation is often called a “hidden tax.” The combined result could be more tax owed and less money left over for spending on college tuition, vacations, dining out, groceries and gasoline. Because inflation reduces the purchasing power of after-tax income, people could essentially earn higher salaries end up paying more in taxes, and find themselves with less money to spend.

 

The IRS (Internal Revenue Service) adjusts certain core tax provisions upward to account for inflation each year. For 2022, the standard deduction—the flat amount by which you reduce your taxable income—will rise to $12,950, up $400 from last year ($25,900 for married couples, up $800). Last November, the IRS also adjusted the nation’s core seven tax brackets upward by 3.1%. When brackets are increased, many people can take home more after-tax dollars, and the highest earners will need to earn more than $539,900 before moving into the 37% bracket.

 

Other provisions, such as capital gains, in the tax code aren’t adjusted for inflation. The result could mean owing a larger tax bill from the profits of a sale. Ultimately, those affected by tax-related provisions that aren’t indexed for inflation will suffer more from loss of purchasing power during a period of higher inflation as those benefits erode faster.

 

Taxes are tricky, and the start of the year is a great time to review your financial situation so that you’re in the best position relative to your income and tax planning. To review your planning and develop a strategy, reach out to one of our financial professionals at www.cfsplanners.net.

Adapted from Financial Planning1

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1 https://www.financial-planning.com/news/higher-earners-may-owe-more-to-uncle-sam-for-2022-even-if-build-back-betters-tax-increases-dont-materialize?utm_source=newsletter&utm_medium=email&utm_campaign=V2_FP_TaxTuesday_2021%2B%27-%27%2B01042022&bt_ee=XBP9UXvate9RlXVUgsK6cYVEazXmwOkda1b5NUr98p3lmlG6td%2BrH6sayG78x%2B2J&bt_ts=1641315674536

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