En español | In the American tax system, income taxes are graduated, so you pay different rates on different amounts of taxable income, called tax brackets. The more you make, the more you pay. For example, a single taxpayer will pay 10 percent on taxable income up to $9,700 earned in 2019. The top tax rate is 37 percent for taxable income above $510,300 for tax year 2019. There are seven tax brackets in all.
The Internal Revenue Service increases those brackets from year to year to account for inflation and reduce “bracket creep,” when taxpayers get pushed into higher tax brackets not because they earned more money, but because of rising inflation. In tax year 2018, for example, a single person with taxable income up to $9,525 paid 10 percent, while the top bracket of 37 percent kicked in above $500,000. Similarly, brackets for income earned in 2020 have been adjusted upward as well.
Importantly, your highest tax bracket doesn't reflect how much you pay in federal income taxes. If you're a single filer in the 22 percent tax bracket for 2019, you don't pay 22 percent on all your taxable income. You pay 10 percent on taxable income up to $9,700, 12 percent on the amount from $9,701 to $39,475 and 22 percent above that (up to $84,200).
You should also note that the standard deduction rose to $12,200 for single filers for the 2019 tax year from $12,000 the previous year. The standard deduction for couples filing jointly rose to $24,400 in the 2019 tax year from $24,000 in the 2018 tax year. Single filers age 65 and older can increase the standard deduction by $1,650. Each joint filer 65 and over can increase the standard deduction by $1,300 apiece, so $2,600 total if both joint filers are 65-plus. You need to have more tax deductions than the standard deduction to make itemizing your tax return worthwhile.
The IRS uses the chained consumer price index (CPI) to measure inflation, as mandated by 2017 tax reform. Like the more well-known consumer price index, the chained CPI measures price changes in about 80,000 items. The chained CPI takes into account the fact that when prices of some items rise, consumers often substitute other items. If the price of beef rises, for example, people switch to chicken.
If you're not an economist, the main difference between the two measures is that, over time, the chained CPI rises at a slower pace than the traditional CPI. (Which, to be precise, is the Consumer Price Index for All Urban Consumers or CPI-U.) From 2000 through 2017, the CPI rose by 45.7 percent and the chained CPI by only 39.7 percent, a difference of nearly 6 percentage points.
Editor's note: This article was originally published on January 7, 2020. It has been updated with the AARP Top Tips video.