How Rising Inflation Can Affect Your Federal Tax Bracket Next Year
Inflation is a word that’s been at the top of every headline and the tip of everyone’s tongue lately. And, with everyday expenses increasing in front of our eyes, many Americans are left wondering whether rampant inflation will have any long-term effects that aren’t as obvious. A good example, for instance, is how inflation affects their tax bracket.
We get it — Worrying about taxes isn’t at the top of your concerns as you run to the grocery store and pay 20% more for items than last year.
But, many Americans don’t realize how bracket creep can make a dent in their income, even if they got a big raise during the pandemic.
What Are The Current Tax Brackets?
The American federal income tax brackets are separated by percentage and filing status. Our government uses a progressive tax system, which means that as our income increases, the tax percentage increases as well.
A common misconception is that if you get a raise, you are moved up to a higher tax bracket. As you can see above, each portion of income is taxed at a set rate. When you get a raise, your additional income is taxed. So, though you will pay more in taxes, all of your income isn’t taxed at a set percentage!
Please note that your state or city may have their own tax brackets. Be sure to forget about these taxes as they will also take a portion of your gross income.