Inflation has a silver lining, because it may give you an unexpected 'tax cut' in 2023, in a way.
As you probably know, the federal income tax rate brackets, and many other federal tax parameters, are indexed for inflation using a factor based on the monthly average of changes in the chained Consumer Price Index, or chained CPI. Due to the way they are calculated, upticks in the chained CPI numbers during inflationary times, like now, are a bit lower than upticks in the regular CPI numbers that you read about in the media. But the differences are relatively trivial.
Impact of inflation on 2022 and 2023 tax brackets For the 12 months that were used to calculate the inflation adjustment factor for the 2022 tax year, inflation was mild in the first half and started running hotter only in the second half. As a result, the inflation adjustment factor for 2022 was only about 3.1%. For example, the beginning of the 24% rate bracket for a married joint-filing couple is $178,150 of taxable income for 2022. That’s 3.
Impact: Other things being equal, you could have 7% more taxable income next year and have the same federal income tax bill as this year. Nice. While almost nobody likes inflation, it’s an ill wind that blows no good, as the saying goes. An assumed 7% inflation adjustment factor will increase the top of the 0% federal income tax bracket for 2023 long-term capital gains and qualified dividends as follows:
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