A combination of rising wages and inflation is threatening to push some taxpayers into higher tax brackets this year, which means you could owe more to Uncle Sam come 2023’s filing season.
With inflation at its highest level in nearly 40 years—prices for consumer goods rose 6.8% in November 2021 compared to the same period a year ago—bigger paychecks landing in higher tax brackets could actually buy less. According to a survey by The Conference Board, US businesses plan to boost wages by 3.9% in 2022, the highest increase since 2008. This increase follows wages rising 4.3% in November 2021 due to pay increases by businesses seeking to attract and retain talent from the “Great Resignation” pool.
A pay raise can be enough to nudge a taxpayer into a higher tax bracket, explaining why inflation is often called a “hidden tax.” The combined result could be more tax owed and less money left over for spending on college tuition, vacations, dining out, groceries and gasoline. Because inflation reduces the purchasing power of after-tax income, people could essentially earn higher salaries end up paying more in taxes, and find themselves with less money to spend.
The IRS (Internal Revenue Service) adjusts certain core tax provisions upward to account for inflation each year. For 2022, the standard deduction—the flat amount by which you reduce your taxable income—will rise to $12,950, up $400 from last year ($25,900 for married couples, up $800). Last November, the IRS also adjusted the nation’s core seven tax brackets upward by 3.1%. When brackets are increased, many people can take home more after-tax dollars, and the highest earners will need to earn more than $539,900 before moving into the 37% bracket.
Other provisions, such as capital gains, in the tax code aren’t adjusted for inflation. The result could mean owing a larger tax bill from the profits of a sale. Ultimately, those affected by tax-related provisions that aren’t indexed for inflation will suffer more from loss of purchasing power during a period of higher inflation as those benefits erode faster.
Taxes are tricky, and the new year is a great time to review your financial situation so that you’re in the best position to pay the least amount of taxes possible. To review your income and create a strategy, contact the financial professionals at our office today at (540) 720-5656.
Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter. Chase, as a fiduciary, believes in putting his clients interests first, and building out plans for his clients where they can have a happy and fruitful retirement. He married his beautiful wife in February 2022 and both use most of their free time chasing around their little pup, Aurora.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.