Inflation adjustments of income tax provisions

The U.S. federal government updates the applicable amounts under certain tax provisions based on inflation. By making these adjustments, certain distortions in the effect of various tax liabilities or other tax-related items may be avoided.

These amounts relate to many taxable items, such as the amount you can claim as the standard deduction or the amount of money you can contribute to your traditional or Roth IRA. There are some provisions of the tax code that are not indexed for inflation, however; the taxes related to those provisions have added an extra tax burden on U.S. taxpayers over the past decades.

Individual income tax thresholds that are adjusted for inflation

The U.S. federal income tax thresholds indexed for inflation that most people know best are the federal income tax brackets. The U.S. federal income tax is progressive and marginal, which means that taxpayers progressively pay more tax for increasing portions of their income, up to a certain threshold. For example, an individual’s first $11,925 in yearly income for 2025 is subject to tax at a 10% federal rate. The money the individual makes between $11,926 and $48,475 is taxed at 12%, and the money they make between $48,476 and $103,350 is taxed at 22%. So if you are an individual taxpayer and you made $89,450 in 2025, ignoring for illustrative purposes any deductions or tax credits (or any other items that may affect your tax liability), your U.S. federal income tax (based on these federal graduated income tax brackets) would be approximately ($11,925*.10 = $1,192.50) + ($36,550*.12 = $4,386) + ($40,975*.22 = $9,014.50) = $14,593.

One consideration in tax planning may involve trying to lower your income below the threshold of a particular tax bracket. If the U.S. federal income tax brackets weren’t indexed for inflation, you might get a raise to compensate for the increased cost of living, but you might also find yourself in a higher tax bracket and pay more in tax. In that case, you would likely be getting fewer goods for your money due to inflation, while the government would nevertheless be taking a larger portion off your bottom line in U.S. federal income taxes.

The U.S. federal income tax bracket thresholds updated for the 2025 tax year (for filing your taxes in 2026) are listed by the Internal Revenue Service (IRS) as follows:

The standard deduction and the alternative minimum tax

Two other elements of U.S. federal income taxation are the standard deduction and the alternative minimum tax (AMT). These amounts are also indexed for inflation.

The standard deduction is a flat amount that may be taken by certain taxpayers, rather than itemizing their deductions. If you are eligible to take the standard deduction, it’s typically a good idea to calculate your potential itemized deductions to see whether itemizing or taking the standard deduction lowers your tax burden.

The alternative minimum tax traces its origins back to the 1960s, driven at least in part by a goal of making sure that certain high income earners who otherwise might have managed to avoid paying any income tax would be required to pay at least a minimum amount of U.S. federal income tax. During the 2000s, the number of middle-income taxpayers who were subject to the AMT increased dramatically. Then the Tax Cuts and Jobs Act of 2017 narrowed the scope of application of the AMT and reduced the number of taxpayers who have to pay it. Currently, the AMT may be of particular concern for certain taxpayers with high income (and possibly those who have multiple sources of income), who might take significant deductions.

The current AMT and standard deduction provisions are scheduled to sunset in 2025, which is something to keep in mind as you consider your tax strategy for the next few years.

Net investment income tax

The net investment income tax (NIIT) applies to certain net investment income of certain taxpayers above a certain threshold, including single filers with modified adjusted gross income (MAGI) over $200,000 (single or head of household) or joint filers (i.e., married filing jointly) with MAGI over $250,000. The tax rate is 3.8%. Note that these income thresholds are not indexed for inflation. If the NIIT had been inflation-adjusted, the MAGI limits would be higher. Because the NIIT income thresholds are not indexed for inflation, as taxpayers’ incomes increase over time above the fixed threshold, the NIIT burden impacts more taxpayers and is generally heavier for applicable taxpayers whose income mix is more heavily weighted toward investment income instead of earned income.

The bottom line

Knowing what tax bracket you’ll fall into come Tax Day is a key first step in filing your federal and state taxes each year. Of course, taxpayer circumstances may vary individually, and the effect of the items discussed above on any particular taxpayer will differ or depend on many different factors. For guidance on tax strategies, consult a tax professional who can address your questions and concerns.

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