The Quiet Ways Inflation Changes Your Tax Outcome

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The annual inflation rate for 2025 was 2.7%, according to the U.S. Inflation Calculator. This isn’t much changed from the year before — down just 0.2%.

But even a slight fluctuation can have some surprising repercussions for individual taxpayers. In fact, inflation can cause your tax liability to rise or fall in ways that aren’t immediately clear on the surface.

These are the quiet ways inflation can change your tax outcome and what you can do about it.

It Could Push You Into a Higher Tax Bracket

This year, per the IRS, the marginal tax rates for individuals based on income are:

• $12,400 or less: 10%
• Over $12,400: 12%
• Over $50,400: 22%
• Over $105,700: 24%
• Over $201,775: 32%
• Over $256,225: 35%

The income thresholds double for married couples filing jointly. Individual taxpayers earning more than $640,600 ($768,700 for married couples filing jointly) face a 37% tax rate.

So, why does this matter? Because some employers will increase employees’ salaries based on inflation. If this happens and you’re already balancing on the edge between two tax brackets, it could push you into a higher bracket.

“Wage increases designed to match inflation can silently move taxpayers into a higher marginal tax bracket, despite their true purchasing power not improving at all,” said Jeffrey Anton Collins, former IRS official and tax defense attorney at Tax Law Offices, Inc. “That can result in a larger overall tax bill.”

It Could Affect Your Tax Deductions

The IRS makes annual adjustments based on inflation. One such adjustment is related to the standard deduction size.

For the 2026 tax year, the standard deduction increases to:

• $16,100 for individuals and married individuals filing separately
• $24,150 for heads of household
• $32,200 for married couples filing jointly

In comparison, the 2025 standard deduction was:

• $15,750 for individuals and married individuals filing separately
• $23,625 for heads of household
• $31,500 for married couples filing jointly

But there is a possible downside.

“Inflation also can have the effect of diminishing the value of deductions that are not indexed,” Collins said. This can include caps on certain tax credits or thresholds linked to specific dollar amounts.

In 2025, the deduction increase was 2.8%. Compare that to the same year’s 2.7% inflation rate and you’ll see that the higher deduction amount doesn’t go as far as it seems.

It Could Affect Your Tax Credit Eligibility

There are quite a few tax credits out there, many of which are based on income. Tax credits lower your tax liability on a dollar-for-dollar basis.

Take the Earned Income Tax Credit (EITC) as an example. The maximum credit amount (with three children) is $8,046, per the IRS. But you must meet the following income thresholds to qualify:

• No dependents:
  • $19,104 (single, head of household, married filing separately, widowed)
  • $26,214 (married filing jointly)
• One dependent:
  • $50,434 (single, head of household, married filing separately, widowed)
  • $57,554 (married filing jointly)
• Two dependents:
  • $57,310 (single, head of household, married filing separately, widowed)
  • $64,430 (married filing jointly)
• Three dependents:
  • $61,555 (single, head of household, married filing separately, widowed)
  • $68,675 (married filing jointly)

An indirect effect of inflation comes when wages increase to a point that it puts you just above the income threshold limits for these tax credits. This means you could potentially lose out on hundreds or thousands in credits, just because you’re in a higher bracket.

It Could Mean Nominal Interest or Capital Gains

Even periods of relatively low inflation can affect your interest and capital gains. You might see your balance grow, but when you consider the erosion effect, you might not be gaining nearly as much as you think.

“I’ve met taxpayers who were caught off guard by the taxes they owed on gains that didn’t actually enrich their financial condition,” Collins said.

This means potentially minimal returns on investments that are still fully (or even partially) taxable.

It Could Mean Higher Social Security Taxes

To combat inflation, Social Security receives an annual cost-of-living adjustment (called a COLA). In 2026, the COLA is 2.8%, according to the Social Security Administration (SSA). This means higher monthly benefits, though the amount isn’t much different than the latest inflation rate.

But the income thresholds for Social Security taxes at the federal level aren’t adjusted for inflation. This means a larger portion of your benefits could be subject to taxation.

What You Can Do To Improve Your Tax Outcome

The changes inflation brings don’t always work in the taxpayer’s favor. But there are a few things you can do improve your tax outcome, like any of the below.

• Sell assets that have experienced a loss to offset up to $3,000 in ordinary income (tax-loss harvesting), according to Vanguard.
• Take advantage of higher contribution limits for tax-advantaged accounts (like IRAs or health savings accounts [HSAs]) to offset your tax bill now or later.
• Review your withholding and estimated payments regularly.
• Don’t assume your previous tax strategy will work every year.

When in doubt or dealing with a complex tax situation, consult a tax professional about your options.

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