The IRS updates its tax brackets each year due to inflation. While the percentages stay the same, the IRS grants more leeway for how much money is taxed within each percentage.
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For instance, single filers had to pay a 10% tax rate on their first $11,925. However, the IRS upped this number to the first $12,400. That means more of your money stays in the 10% tax rate, and it’s just like that all across the board.
The new tax brackets feature many winners, but a small number of people may end up with higher tax bills.
The Winners
Households that maintained the same income year-over-year will emerge as the biggest winners, especially the middle class. Regardless of whether you earned $50,000 or $200,000, you will have a lower tax bill if your income stayed the same year-over-year.
However, there is an added benefit for the middle class since the standard deduction also went up. This deduction rose to $32,200 for married couples filing jointly and $16,100 for individuals, according to the IRS. Those figures are up by $700 and $350, respectively, representing extra money that won’t be taxed. The standard deduction and 401(k) contributions can result in very low tax bills for the middle class.
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The Losers
If your income jumped significantly over the past year, you will face a much higher tax bill. While going from $80,000 to $120,000 in annual income is a net win, some people get caught by surprise when it’s tax season. A higher income can push you into a higher tax bracket even after the IRS adjusted its tax rates for inflation.
People who boosted their income high enough to become ineligible for certain tax deductions and credits will also get hit a little harder during tax season. For instance, the Earned Income Tax Credit (EITC) is a popular program that provides a tax break to low- and middle-income individuals and families.
However, this same tax structure discourages people from boosting their income. A slight income boost doesn’t benefit people who use the EITC since they may become ineligible for it. This setup creates a “go big, or go home” model where someone has to significantly increase their income within a single year to justify the extra hours.
Final Take To GO
The IRS adjusts its tax brackets each year due to inflation, which helps people who have maintained the same income. However, people may still end up with higher taxes if their income grows, especially if higher earnings make people ineligible for the EITC and similar incentives that are designed to help people with lower incomes.
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This article originally appeared on GOBankingRates.com: Tax Brackets Shifted: Who Pays More, Who Pays Less in 2026
