Every year, the IRS adjusts many provisions of the tax code for inflation. The annual inflation adjustment was put in place in the early 1980s to prevent inflation from pushing taxpayers into higher tax brackets and increasing tax rates even as real incomes stay constant.

During the last decade, these annual adjustments have been modest because inflation was modest. From 2011 to 2020, the percent change in the annual average CPI-U was between 0.1 percent and 3.1 percent each year.

As the economy has recovered from the COVID-19 recession, inflation has accelerated. In 2021, the annual average CPI-U rose by 4.7 from the previous year, and according to the Bureau of Labor Statistics, the CPI-U for August 2022 was 8.3 percent higher than it was in August 2021.

Higher inflation means that tax parameters will increase by much more this year than they have over the past decade. Table 1 below shows initial estimates of select individual income tax parameters for 2023 compared to values for 2022. Parameters, such as tax brackets and the standard deduction, will increase by around 7 percent on average in 2023.

The adjustment is slightly smaller than the most recent annual inflation number because it is based on the average consumer price index between September of last year and August of this year, not year-over-year inflation. In addition, the tax code does not use the more commonly cited CPI-U. Instead, it uses Chained CPI-U, which generally grows more slowly. Parameters are also rounded either up or down. The rounding conventions are inconsistent and vary by provision.

Some parameters are not adjusted for inflation. For example, the income threshold of the 3.8 percent Net Investment Income Tax is fixed at $200,000 ($250,000 married filing jointly). This means that as price levels rise, more income will be subject to this tax. And, although the value of the refundable portion of the child tax credit (the Additional Child Tax Credit) is adjusted for inflation, inflation erodes the value of the overall credit because it is fixed at $2,000.

The IRS typically releases the final values for all parameters in October or November.

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