What effect would a tax increase have on income?
With tax season rapidly approaching, many are wondering if an increase is in their future and if so how it will impact their income.. we took a look.
President Biden made a promise on the campaign trail that he would not raise taxes on anyone making less than $400,000 a year. If taxes were to increase that would correlate with a decrease in a person's net income, meaning what they take home after taxes have been subtracted from their annual gross income.
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The impact of inflation on taxes
The Bureau of Labor Statistics reported that the Consumer Price Index has increased 0.5 percent in December, for a total of seven percent over the last twelve months. The rate captured in December was down from those recorded in October (0.9 percent) and November (0.8 percent).
The White House responded to the news "demonstrates that we are making progress in slowing the rate of price increases. At the same time, this report underscores that we still have more work to do, with price increases still too high and squeezing family budgets."
2021-2022 Marginal Tax Rates
- 10 percent for incomes $10,275 or less ($20,550 for married couples filing jointly)
2021-2022 Marginal Tax Rates
- 12 percent for incomes over $10,275 ($20,550 for married couples filing jointly)
- 22 percent for incomes over $41,775 ($83,550 for married couples filing jointly)
- 24 percent for incomes over $89,075 ($178,150 for married couples filing jointly)
- 32 percent for incomes over $170,050 ($340,100 for married couples filing jointly)
- 35 percent for incomes over $215,950 ($431,900 for married couples filing jointly)
- 37 percentfor individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
Source: IRS
While tax rates on tax brackets may not be increased this year, inflation will make taxes feel higher from a disposable income perspective. As inflation has risen rapidly across the economy, a person's disposable income has decreased, because their dollars do not go as far faced with increased prices.
2021-2022 Standard Deduction
- Married couples filing jointly: $25,900 (+$800 from the prior year)
- Single and married individuals filing separately: $12,950 (+$400)
- Heads of households: $19,400 (+$600)
Source: IRS
In November, the Internal Revenue Service released updated tax rates based on inflation projections.
The agency reported that the standard deductions across the tax filer's status would be increased to account for increased inflation.