Can inflation affect your 2021 tax bill?
With inflation reaching historic levels, many taxpayers getting ready to file are wondering if their tax return and refund will be impacted by increasing prices.
Over the last twelve months, the Consumer Price Index, has risen seven percent. This is one of the fastest increases in prices in decades, and has many economist worried about the prospects of inflation not being a result of transitory effects from the economic recovery.
As tax season begins, many could see the impacts of inflation reflected in their tax returns.
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.
The advantages of altering tax brackets, standard deductions, and personal exceptions
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.
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 percent for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
Source: IRS
The Tax Foundation noted that while the brackets have been altered to adjust for inflation, the standard deduction has not meaning that it will "lose value due to inflation, raising tax burdens in real terms."
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
The organization also noted that fifteen states and the District of Colombia do not "adjust brackets for inflation, 10 states leave their standard deduction (if they have one) unadjusted, and 18 have an unindexed personal exemption." This can mean that inflation harms people in these states more than others as they see inflation cut into their wage growth, if any was seen, as much higher rate.
IRS advises that for early filing
After many experienced delays in receiving their tax refunds last year, the IRS is encouraging those who want their quickly to file right away.
"There are important steps people can take to ensure they avoid processing delays and get their tax refund as quickly as possible. We urge people to carefully review their taxes for accuracy before filing. And they should file electronically with direct deposit if at all possible; filing a paper tax return this year means an extended refund delay," said IRS Commissioner Chuck Rettig.