31 Dec Do income tax brackets go up with inflation?

Q. We all have seen that prices are going up due to inflation and wages may eventually follow. But are income tax brackets at the federal and state level automatically adjusted upward by the Consumer Price Index (CPI) to keep the government from automatically collecting a larger percentage of the pay? And what about the retirement income cliff of $100,000? Is that adjusted?
— Taxed enough

A. You’re correct that inflation is rising.

And the government does take inflation into account.

Prior to the Economic Recovery Tax Act of 1981, federal income tax brackets were not indexed to inflation, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

During the years between 1975 to 1981, inflation was in double digits, and by 1981, it was almost 15% per year, Kiely said.

“Back then if you only got a 10% pay raise you were going backwards,” he said.

On top of that, we had what was called “tax bracket creep.”

“Your pay was going up, which pushed you into a higher income tax bracket. But your pay was not going up enough to keep up with inflation, plus your taxes were going up even faster because of bracket creep,” he said.

The Economic Recovery Tax Act of 1981 changed all of that.

From 1981 on, tax brackets were adjusted every year to take inflation into account, Kiely said.

“New Jersey income tax brackets are not automatically adjusted for the effects of inflation. Periodically, the state legislature will pass a law to adjust the tax brackets,” Kiely said. “So, yes New Jerseyans are subject to tax bracket creep. Time for a letter to your representatives in Trenton.”

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This story was originally published on Dec. 31, 2021.

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