Higher Inflation Could Lead to a Higher Paycheck

Summary

Podcast Summary: WSJ Your Money Briefing – Higher Inflation Could Lead to a Higher Paycheck

Date: October 25, 2021
Host: J.R. Whalen (B)
Guest: Richard Rubin, WSJ Tax Reporter (A)

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Overview

This episode explores how rising inflation, while squeezing consumers, could actually boost take-home pay by triggering automatic inflation adjustments in the tax code. Host J.R. Whalen discusses with WSJ tax reporter Richard Rubin how these inflation-related tax code shifts work, who benefits, and what limitations remain for certain deductions. The conversation focuses on practical implications for wage earners as well as higher-income individuals, clarifying timing and the varying impact based on personal circumstances.

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Key Discussion Points & Insights

1. How Inflation Triggers Tax Code Adjustments

(01:51–03:31)

• Inflation Indexing Explained:
  • The IRS annually adjusts critical tax parameters—such as the standard deduction and tax brackets—in line with inflation.
  • "As inflation happens, the tax system doesn't bite you more or less generally than it would have in the prior year." (Richard Rubin, 00:58)
• Purpose:
  • Designed to prevent so-called “stealth tax increases," these adjustments ensure that rising incomes due to inflation don’t push individuals into higher tax brackets purely because of price changes, maintaining the “real” tax status quo.

2. Impact on Paychecks and Tax Withholding

(03:31–04:21)

• Take-Home Pay Changes:
  • When the new tax year begins, the IRS updates withholding tables for employers, typically meaning lower federal tax is withheld from paychecks—so take-home pay goes up, all else equal.
  • The impact depends on individual wage changes and personal situation.
  • “If you happen not to get a wage increase between December and January, that's when you'd see at least some sort of change in your take home pay because of these inflation adjustments.” (Richard Rubin, 03:50)
• Final Settlement:
  • These changes become truly final and visible when filing the following year’s tax return (for tax year 2022, this would be in early 2023).

3. Where Inflation Adjustment Does Not Apply

(04:21–05:48)

• Fixed Deductions and Limits:
  • Some tax code elements are not indexed to inflation, creating “creep” over time:
    • Capital loss deduction cap ($3,000)—unchanged for more than 40 years.
    • Tax-free home sale exclusion ($250,000 single/$500,000 married)—unchanged for over 20 years.
• Intentional Policy Choices:
  • Lawmakers sometimes leave these thresholds fixed for revenue reasons or in hopes of discreetly increasing tax revenue as more people become affected.
  • “Sometimes it's intentional. Sometimes they're trying to have a provision pinch more over time, but in a sort of sneaky way.” (Richard Rubin, 05:14)

4. Effectiveness of Inflation Adjustments

(05:48–06:19)

• Variable Relief:
  • The benefit depends highly on the individual’s spending patterns.
  • For those whose expenses have risen sharply, the inflation adjustment may not keep pace.

5. Implications for Higher-Income Individuals

(06:19–07:00)

• Bracket Creep for the Affluent:
  • Certain income thresholds for additional taxes are also unindexed:
    • Net investment income tax kicks in at $200,000–$250,000—these levels haven’t budged for 8–10 years, so inflation pushes more people into these higher-tax categories over time.

6. Timing: When Do These Changes Matter?

(07:00–07:23)

• Implementation Timeline:
  • Inflation adjustments affect only the next tax year (2022 for this episode’s context), and their impact appears on the return filed a year and a half later (early 2023).
  • “These changes don't affect the return that you're going to file in early 2022…they only sort of get resolved on the return that you file a year and a half from now in early 2023.” (Richard Rubin, 07:04)

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Notable Quotes & Memorable Moments

• “So for most wage earners in most years, those basic features of the tax system are tied to inflation. So in this year, in 20, going into 2022, all those parameters will slide upward.”
  (Richard Rubin, 02:28)
• “It really is going to depend on any individual situation what the increase will be.”
  (Richard Rubin, 03:35)
• “There is a $3,000 limit on how much in capital losses...That $3,000 has been in the law that way for more than 40 years.”
  (Richard Rubin, 04:27)
• "Sometimes they're trying to have a provision pinch more over time, but in a sort of sneaky way."
  (Richard Rubin, 05:14)

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Timeline of Important Segments

| Timestamp | Content | |:-------------:|:----------------------------------------------------------------------------------------------------------------| | 00:36–00:58 | Host sets up the problem: 2% raises lagging inflation, but tax code may offer relief. | | 01:51–03:31 | Richard Rubin explains how automatic tax code inflation adjustments work. | | 03:31–04:21 | Discussion of paycheck impacts and updated withholding tables. | | 04:21–05:48 | Analysis of fixed, non-inflation-adjusted tax code elements (e.g., capital loss caps, home sale exclusions). | | 05:48–06:19 | Limitations: Adjustments may not fully compensate for higher prices. | | 06:19–07:00 | Extra considerations for higher-income earners and bracket creep. | | 07:00–07:23 | Clarification on when these changes affect tax returns. |

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Conclusion

Rising inflation automatically raises certain tax code thresholds, which will shield more income for the average American worker and could boost paychecks starting in 2022. However, not every tax break is inflation-adjusted, and some fixed items—like caps on capital loss deductibility—will feel stricter as time goes on. How much relief individuals actually see will depend on their personal wage growth and spending habits, and for higher-earning taxpayers, unindexed surtax thresholds spell growing tax liabilities in the future.

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This concise yet detailed summary captures insights directly from the conversation, and the timeline allows listeners to quickly locate topics of interest in the original episode.

Transcript

[A]

Access to affordable credit helps me pay my employees, but I don't really need it.

[B]

Inflation is killing me, but who cares?

[A]

Big retailers are making record profits.

[B]

That's why we support the Durbin Marshall credit card bill.

[A]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[B]

they need while increasing megastore profits. They deserve it, don't they?

[C]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[B]

Here's your money briefing for Monday, October 25th. I'm J.R. whelan for the Wall Street Journal. That 2% raise you got this year might not be doing a lot to offset skyrocketing prices on basic expenses like food, gas and clothing, but there could be some relief on the horizon. Higher inflation triggers some automatic adjustments in the nation's tax laws that could mean a little more money in your paycheck.

[A]

These adjustments are designed so that as inflation happens, the tax system doesn't bite you more or less generally than it would have in the prior year.

[B]

Coming up, we'll talk to WSJ tax reporter Richard Rubin about when you're likely to see your check go up and how inflation triggers changes that affect other areas of your personal finances. That's after the break.

[C]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.

[B]

Consumer prices began to rise around the end of last year when demand peak pick back up and they haven't stopped. That's left a lot of Americans having to stretch their paycheck. But higher inflation also triggers changes to the formulas in the nation's tax laws, and that could mean some relief for your wallet. WSJ tax reporter Richard Rubin has been running the numbers and he's here to boil things down for us. Rich, thanks so much for coming on the show.

[A]

Oh, happy to do it.

[B]

So, Rich, this is kind of complex, so help us understand this. There are areas of the nation's tax laws that are designed to adjust based on the rate of inflation to help people out who are getting clobbered by higher prices, who would benefit from that.

[A]

So a lot of the main features of the tax code that we think about all the time, the standard deduction, the tax brackets, those are tied to inflation. So every year The IRS looks at what consumer prices are, follows a formula set out in the law, and raises those thresholds so that as your income rises, you don't get bumped into a higher bracket too soon, and you can use the standard deduction to shield more of your income. So for most wage earners in most years, those basic features of the tax system are tied to inflation. So in this year, in 20, going into 2022, all those parameters will slide upward. What Congress is trying to do is to not have stealth tax increases to sort of slide the tax code upward along with prices and wages. And so these adjustments are designed so that as inflation happens, the tax system doesn't bite you more or less generally than it would have in the prior year. So it's, it's designed to keep the, sort of, keep the real status quo, even though the numbers might change.

[B]

Okay, so how would that work out to a bump in someone's take home pay, and how much would that increase be?

[A]

Right. So it really is going to depend on any individual situation what the increase will be. But what will happen is the IRS will update the withholding tables and then so will your employer. And so when you flip over from December to January, less money will come out for income taxes from your paycheck. Now obviously that's designed in real terms to help cover the costs of higher prices. And maybe you also have higher wages. But if your wages, you know, if you happen not to get a wage increase between December and January, that's when you'd see at least some sort of change in your take home pay because of these inflation adjustments. And then that all gets sort of finally reconciled on the tax return that you'll file in early 2023.

[B]

Okay, but Rich, what's the catch? Are there areas of the tax law that affect consumers that don't always adjust with inflation?

[A]

There are some examples that we can think about. One of the ones that's been around for the longest is There is a $3,000 limit on how much in capital losses. Like if you sell stock for a loss, how much of that you can deduct from ordinary income. That $3,000 has been in the law that way for more than 40 years, the maximum that you can have as tax free income when you sell your home. Also 250,000 for an individual, 500,000 for a married couple. That's been in the law for more than 20 years. So you have some of these fixed numbers and they sort of creep up over time, and sometimes Congress bumps them up, and sometimes Congress just leaves them there.

[B]

Well, those are some pretty heavy hitting deductions that could really come in handy that Congress isn't allowing to fluctuate with inflation.

[A]

Well, sometimes it's intentional. Sometimes they're trying to have a provision pinch more over time, but in a sort of sneaky way. And then sometimes that also helps them meet revenue targets. So they might, you know, it might, a particular provision might raise more money by not tying it to inflation. It might appear to raise more money. And then with everyone sort of knowing they might come along later and fix it and resolve it. And so it's definitely part of the decisions that Congress makes. Every time it sets one of these numbers, it tries to figure out should it be tied to inflation or not.

[B]

All right, so the standard deduction and the tax bracket adjustments are designed to keep up with inflation. But do we know how much they'll lessen the bite inflation will take from people's finances?

[A]

It depends on the bucket of goods and services that you're buying. I think for people who are buying things that have gone up a lot in price, then this won't be enough. And for people who are purchasing less and saving more, perhaps, maybe this will not be as you know, maybe this will be more than they need. It really is going to depend on your individual circumstances.

[B]

Now, a lot of what we've been talking about would benefit middle income workers. How would higher income workers fare under these changes?

[A]

So again, it depends on what they're doing. So the capital loss deduction that we talked about is, you know, something that tends to be for higher income people. There's a 200,000, 250,000 set of taxes that take effect when you hit those income levels. Those have been stuck in the law since they took effect about eight to 10 years ago. And so more and more higher income people will come into contact with those over time. And so that I think is something that higher income investors and workers, again, depending on their particular situation, might encounter.

[B]

And when will people have to start thinking about plugging these changes into their tax returns?

[A]

So the important thing to remember is these changes don't affect the return that you're going to file in early 2022. These are changes that take for the 2022 tax year and then they only sort of get resolved on the return that you file a year and a half from now in early 2023.

[B]

All right, that's Wall Street Journal tax reporter Richard Rubin. Rich, it's been great having you with us.

[A]

Happy to be here.

[B]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[C]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.