taxes

How "Chained" Inflation Will Erode the New Tax Cuts

Lower inflation adjustments mean smaller annual increases in tax brackets, standard deductions and other breaks.

Note: The editors of Kiplinger's Personal Finance magazine and the Kiplinger Tax Letter are answering questions about the new tax law from subscribers to our free Kiplinger Today daily email. See other reader Q&As about the new tax law, or submit your own question.

Question: The new law changes inflation indexing from the CPI to something called the “chained CPI.” What impact will that have?

Answer: Many parts of the tax law – including the break points for the tax brackets, for example, and the size of the standard deductions – are indexed for inflation, meaning they are automatically adjusted upward to prevent inflation from imposing a sneaky tax increase. If your salary keeps up with inflation but the tax brackets were not indexed, sooner or later you’ll be pushed into a higher tax bracket. Indexing is designed to prevent such “bracket creep.”

Until 2018, indexing was based on the basic CPI (Consumer Price Index), which uses the cost of a group of common goods as its gauge to measure inflation. Because consumers often change their buying habits in the face of price increases, the CPI allows for some substitution of similar goods. The chained CPI differs in that it uses a broader substitution method that stretches over a wider variety of different goods. The practical effect is that this method results in a slower rise in the cost of living. Proponents of the chained CPI consider it a more accurate measure of inflation. Critics see it as a hidden tax increase that compounds over time.

Most Popular

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022

Recommended

Where's My Refund? How to Track Your Tax Refund Status
tax refunds

Where's My Refund? How to Track Your Tax Refund Status

The IRS has an online tool that lets you track the status of your tax refund.
May 25, 2022
Which States' Taxes Are Going Down
Tax Breaks

Which States' Taxes Are Going Down

State lawmakers are cutting income, sales and property taxes to return budget surpluses to residents.
May 25, 2022
Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
May 23, 2022
Medical Professionals: It’s Not Too Late to Save on Your Taxes
tax planning

Medical Professionals: It’s Not Too Late to Save on Your Taxes

If your income rebounded in 2021, consider these four investment and tax-saving moves now. While most of these strategies apply to 2022 and beyond, on…
May 20, 2022