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Millions of Americans could see their salaries increase next year thanks to new inflation adjustments to the tax code.
Due to soaring prices, the standard deduction amount will increase by 7% next year to $27,700, the IRS announced Tuesday.
Although the agency cannot change income tax rates, the income thresholds at which different tax brackets come into effect will increase. The top 37% tax bracket, for example, will begin when married couples have more than $693,750 in income, up 7% from $647,850 this year.
And the maximum amount people can put into flexible healthcare savings accounts will increase from $2,850 to $3,050.
Much, but not all, of the tax code is automatically indexed to inflation, which is designed to try to reduce “slice creep” – the phenomenon where people’s tax bills go up because their income increases faster than the tax thresholds of the code.
Adjustments to inflation, dictated by formulas carved into law, are usually modest, but rapidly rising prices are now translating into particularly large changes. For many this will mean more take home pay as less tax will be withheld by their employer.
The IRS announced adjustments to more than 60 provisions, including one increasing the per person exclusion from estate tax by nearly $900,000. That means a wealthy married couple could exclude almost $26 million from estate tax.
The annual exclusion for gifts will increase from $16,000 to $17,000, the IRS said.
Other parts of the code are not price related.
When people have to start paying taxes on their Social Security benefits — $32,000 for couples — hasn’t changed since the Reagan administration, and inflation pushes more people above this threshold.
A $10,000 cap on the state and local tax deduction is also not tied to inflation. A 3.8% surtax on investments is also not imposed on couples earning more than $250,000.
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