2027 Tax Bracket Changes: Where Inflation Still Raises Tax Costs

After the Internal Revenue Service released the 2027 federal income tax bracket thresholds, taxpayers nationwide are closely examining how the inflation-driven changes will affect their household finances.

The new thresholds aim to prevent "bracket creep,” when inflation pushes taxpayers into higher tax brackets without increasing purchasing power. The standard deductions are raised to $16,600 for single filers and $33,200 for married couples filing jointly, while tax rates remain the same across seven categories ranging from 10% to 37%. 

Below, Michael Faulkender, the William A. Longbrake Professor of Finance at the University of Maryland's Robert H. Smith School of Business, assesses the broader economic implications of the tax adjustments. A former U.S. Treasury deputy secretary, acting IRS commissioner and Treasury chief economist, Faulkender says Inflation-adjusted tax brackets ease bracket creep, but taxpayers still face inflation-related burdens through housing and capital gains taxes

How effective are the 2027 tax bracket adjustments at limiting bracket creep for middle-income Americans?

Faulkender: Inflation-adjusting the brackets is something we have been doing for a very long time. These adjustments partially, but not fully, offset bracket creep because wage growth usually exceeds inflation, so inflation adjustments alone are not sufficient. They have not kept up with housing because the inflation measure does not include interest rates, and when rates rise significantly, as they did under the Biden administration, the tax bracket adjustments do not account for that.

What tax-related effects of inflation remain unaddressed by these adjustments?

Faulkender: Another big place where inflation has a tax effect is that capital gains are not indexed for inflation. So, if prices rise 3% and your asset goes up in value by 3%, you might say that’s a wash. But the 3% increase in asset value is still subject to capital gains tax, meaning the taxpayer is ultimately worse off. That is why some of us argue that capital gains, particularly on housing, should be indexed for inflation.