How Inflation Can Impact Your Taxes

Inflation. Inflation. Inflation. You’re hearing and thinking about it a lot lately —  especially when you go to the store for “just a few items” and see a sky-high amount on your receipt. That’s because, for a while, inflation rates in the U.S. have hovered around a 40-year high. 

That means that two years ago, you paid around $1.34 for a dozen eggs. Now, a dozen eggs might cost $2.07 or more. (It wasn't that long ago when soaring egg prices meant you were paying, on average, about $3.59 for a dozen.)

Thankfully, with federal taxes, inflation might not have the same harsh impact. That's because the IRS makes annual inflation adjustments to more than sixty tax provisions.

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IRS inflation adjustments 2023

When inflation is high, IRS inflation adjustments can increase the value of various federal tax credits and deductions. The inflation adjustments that apply for the 2023 tax year (and that have just been released by the IRS for 2024), may not create a huge change in your tax bill or tax refund — if you’re expecting one. But it’s still important to know which key tax deductions and credits are adjusted for inflation.

This information might help your tax planning and help you save some money when it's time to file your 2023 tax return. (And, if you like to plan ahead, the amounts can help with your 2024 return as well.)

2024 federal tax brackets and inflation

To understand the relationship between inflation and federal income tax brackets, it is helpful to appreciate what inflation is and what has caused inflation to be high.

Inflation is essentially an increase in the price of goods and services, coupled with a reduction in the value of money. It’s measured by an index (typically the consumer price index, CPI) that compares the prices of various goods over time (take for example, the cost of eggs mentioned in the introduction).

While various market forces drive inflation, the record-high inflation since last year has been caused, in part, by factors that converged during and after the COVID-19 pandemic. For example, soaring consumer demand for goods and real estate, supply chain issues and shortages, strong job growth, and increased wages. Some of those factors, like job growth, have persisted.

Even with high inflation, though, the seven federal income tax rates generally don’t change. They are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the federal income tax brackets tied to those rates are inflation-adjusted yearly. 

So, for the 2023 tax year (and then again in 2024), you may feel like you received a bit of a tax break, even if your taxable income is essentially the same as last year. That's because you could end up in a lower tax bracket with a lower tax rate that goes with it.

• Last year, for example, single filers with $41,776 to $89,075 of taxable income were in the 22% federal income tax bracket. For 2023, that bracket applied to single filers with taxable income from $44,725 to $95,375.
• So, if you have $42,000 of taxable income in 2022 and this year, 2023, you will move from the 22% federal tax bracket to the 12% bracket when you file your 2023 tax return in April 2024. 
• Because the tax brackets are inflation-adjusted, the 12% tax bracket applies to single filers making $11,000 to $44,725 for 2023.

Since relatively high inflation has hung on for a while, the inflation-adjusted income tax brackets for 2024 (just released by the IRS on Nov. 9) are more favorable for some people than the previous year's amounts. 

Also, you might avoid so-called “bracket creep” (i.e., when a person’s income essentially stays the same, but they still end up in a higher tax bracket.)

Standard deduction 2024

Standard deductions are also adjusted to account for inflation. Those changes might help reduce your tax bill if you don’t claim itemized deductions.

The IRS released the standard deduction for 2023 last October. 

• For the 2023 tax year the standard deduction is $13,850 if you’re single, so that’s an increase of $900 from 2022. 
• For a married couple filing jointly, the 2023 standard deduction is increasing by $1,800, to $27,700.

Compare that to 2022, when the IRS increased the standard deduction for different filing statuses (e.g., single, head of household, married filing jointly, etc.) by a little more than 3%. That was significantly higher than the rate of increase for the previous year's standard deduction amounts.

The IRS just released the standard deduction amounts for 2024, i.e., the amounts you will use when you file your 2024 income tax return in early 2025.

RELATED: 2024 Standard Deduction Amounts Are Here

Note: If you haven't filed your 2022 tax return yet (most tax-extended filings are due Oct. 16) for the 2022 tax year, the standard deduction is $12,950 if you are single. In 2021, it was $450 less. For a married couple filing jointly, the 2021 standard deduction was $25,100. In 2022, it increased by $800 to $25,900.

IRA and 401(k) contribution limts

Limits on how much you can contribute to your 401(k) are also indexed for inflation. This means that if you contribute to your workplace retirement account, which already reduces your taxable income, you may be able to contribute more each year— particularly when inflation is high.

401(k) Contribution Limits 2023: Last October, the IRS announced significant inflation adjustments for the 2023 401(k) contribution limits, and the IRA contribution limit for 2023. The 401(k) contribution limits for 2023 increased to $22,500, while the IRA limit for 2023 also increased to $6,500.

• The 2023 401(k) contribution limit, which is $2,000 more than it was the previous year, applies to employees who participate in not just 401(k) plans, but also in most 457 plans and the federal government Thrift Savings Plan. 
• The catch-up contribution limit for those age 50 or older participating in those plans is also up in 2023, i.e., from $6,500 the previous year to $7,500.
• The IRA contribution limit for 2023 is also up by $500 from the previous year's amount. So, for 2023, you can contribute up to $6,500. If you’re age 50 or older, the IRA catch-up contribution limit is not adjusted for inflation though, so it will stay at $1,000 for 2023.

For 2024 (returns normally filed in early 2025), the 401(k) contribution limit increases to $23,000 and the IRA contribution limit rises to $7,000.

Note: If you haven't filed yet, the 2022 contribution limit for 401(k) plans was $20,500 – up $1,000 from the limit that applied the previous two tax years. If you are at least 50 years old, you can contribute an additional $6,500 in "catch-up" contributions in 2022, for a total of $27,000.

If you're wondering about individual retirement accounts, IRA contribution limits unfortunately didn’t increase for 2023. Total contributions to traditional or Roth IRAs remain limited to $6,000. If you’re age 50 or older, the maximum “catch up” contribution is $1,000, for an annual total of $7,000.

Note: For the 2022 tax year (if you still need to file your return), however, the income ceilings for Roth IRA contributions were adjusted up because of inflation. As a result, the 2022 income limit for making Roth IRA contributions was $214,000 for joint filers and $144,000 for single filers (compared to $208,000 and $140,000, respectively, for the previous tax year).

Capital gains and depreciation

In addition to high prices for common goods like food and gas, inflation also raises the cost of many capital assets likes houses and cars. And because the IRS doesn’t index capital gains for inflation, when inflation is high, capital losses are essentially multiplied.

When it comes to paying taxes on capital gains, the income thresholds for the long-term capital gains tax rates are adjusted each year for inflation. As with ordinary income tax rates, if your taxable income essentially stays the same, you may be able to avoid bracket creep by staying out of the 20% capital gains tax bracket.

The value of depreciation deductions for certain assets can also decline in periods of high inflation. But for the 2023 tax year, the IRS raised depreciation limits for passenger cars, for example. 

First-year depreciation increased last month to $20,200 for the first tax year the vehicle is in use. That is up $1,000 from last year. Depreciation limits for succeeding years of passenger vehicle use also increased slightly.

HSA contribution limits 2023 and 2024

If you are enrolled in a high deductible health plan (HDHP), a health savings account (HSA), offers a tax-free way to pay for qualified health expenses and potentially grow your retirement savings. An additional positive is that the tax-deductible amount you can contribute to your HSA is adjusted annually for inflation. 

For 2023, the contribution limit for individuals is $3,850. For families, the limit is $7,750. 

Note: (For 2022, if you have yet to file), the contribution limit for individuals was $3,650. For families, the limit was $7,300. 

If you are 55 years or older, you can advantage of the “catch-up” contribution of $1,000. In that case, the 2023 contribution limit totals are $4,850 for individual coverage and $8,700 for family coverage.

Because of inflation, for 2024, individuals under a high deductible health plan (HDHP) will have a record-high HSA contribution limit of $4,150. The HSA contribution limit for family coverage will be $8,300. Those amounts are about a 7% increase over what you can contribute this year for 2023.

Flexible Spending Accounts: Health FSA annual contribution limits are also inflation-adjusted. Those adjustments can help stretch the value of the money you use to pay for qualified out-of-pocket health expenses. The FSA contribution limit for 2023 is up about 7% from last year to $3,050. The limit for FSA contribution for 2024 will rise to $3,200.

Social Security COLA 2024

Income limits for taxing Social Security benefits are not adjusted for inflation. However, the Social Security retirement benefits you receive get a cost-of-living adjustment (COLA) that can increase your income.

For 2023, that adjustment was 8.7%, a record high from 5.9% in 2022. However, the Social Security COLA for 2024 for 2024 is 3.2%. The COLA is important because depending on your other taxable income, up to 85% of your Social Security may be taxable.

Are Social Security benefits taxable? Again, the increase in the 2023 Social Security COLA represented a substantial raise for many Social Security recipients. So it could impact your tax liability depending on the circumstances surrounding your other taxable income. You might have to pay taxes on some portion of your Social Security benefit.

The Social Security Benefit Statement (Form SSA-1099) that you receive from the federal government shows the benefits you received in the previous year, which might help you determine whether your benefits are subject to tax.

Note: In addition to the COLA, the Social Security Wage Base will increase for 2024, to $168,600. For 2023, the wage base is $160,200. If you earn more than $160,200 this year, you won't have to pay the Social Security payroll tax on the amount that exceeds that limit. That can result in considerable tax savings for those who earn more than the wage base.

Child Credit 2023, Earned Income Tax Credit, and Adoption Credit

Numerous other tax provisions can be impacted by inflation depending upon whether they're inflation-adjusted. A few of those are highlighted below.

• The Child Tax Credit: The $2,000 Child Tax Credit is not currently adjusted for inflation, but the refundable portion of the credit is.  For 2023, the refundable portion of the child tax credit is up by $1,000 to $1,600. (For the previous year, the IRS increased that by $100 to $1,500. Note: For 2024 (returns you file in early 2025), the refundable portion of the child tax credit goes up by $100 to $1,700.
• The Adoption Credit: If you’re adopting a child, the IRS increased the 2023 maximum adoption tax credit for adoption expenses from $15,950. So that’s a $1,060 increase from last year's $14,890. The 2024 credit amount maximum, which you'll use for tax returns filed in early 2025, is $16,810.
• Earned Income Tax Credit: The EITC is designed to reduce the tax liability for low-to-moderate-income families. The maximum credit amounts, phase-out ranges, and investment income limits are all adjusted annually to account for inflation. However, there are many different EITC amounts for different categories of taxpayers. 

For example, the earned income tax credit for 2023 for eligible filers with no children is $560. The maximum earned income tax credit for eligible taxpayers with one child is $3,995, $6,604 for filers with two children, and $7,430 for filers with three or more children.

To plan for 2024 (returns filed in early 2025), the maximum EITC amount rises to $7,830 for eligible taxpayers with three or more qualifying children.

If you think you qualify for the EITC, be careful when you calculate the amount, or consult a tax professional if you're not sure.

Impact of inflation: What you can do

Unfortunately, there isn’t a lot that most of us can do about inflation. (However, high inflation appears to be easing for 2023.) 

But in any case, because IRS inflation adjustments can impact your federal income tax brackets, the standard deduction, income limits, and other tax deductions and tax credits, you should keep an eye on RS adjustments for tax breaks you typically claim. 

Then consider, with your tax preparer, whether those changes might have a positive, negative, or no impact on your taxes.

Related Content

• 2024 Income Tax Brackets Are Set
• Social Security Wage Base Increases for 2024
• What Are the Federal Tax Brackets for 2023?
• What's the 2023 Standard Deduction?