Since the days of President Ronald Reagan, the IRS has been directed to index the U.S. Tax Code to eliminate an insidious problem called bracket creep. For many years, inflationary increases in wages and salaries caused some taxpayers to cross into higher tax brackets, which were stagnant year after year. President Reagan noticed this phenomenon and worked with Congress to index tax brackets for inflation, preventing bracket creep.

What is the inflation rate for any given year? That question is assigned to the Bureau of Labor Statistics (BLS), part of the Treasury Department. Their annual Cost-of-Living Adjustment (COLA) estimate is used to adjust wages for millions of Americans, unionized or not. Accuracy is paramount for maintaining our daily living standards. Very few people believe we are well served by the BLS, because in the act of living day-to-day, we see prices of necessities rise faster than government reports admit. Many luxury goods rise even faster.

I have long argued for one single rate of inflation (and COLA) for each 12-month period. However, the IRS applies differing rates to various elements of the Tax Code, sometimes even within the same application. Inconsistent application of COLAs presents opportunity for unequal treatment of taxpayers.

This can be seen in the 2026 Tax Bracket adjustments. The lowest 2 brackets are being increased by about 4%, meaning that lower-income Americans can earn 4% more income without being penalized by creeping into a higher tax bracket. However, upper brackets are increasing only about 2.3%. For these people, a 4% increase in income can move them into a higher bracket. This kind of manipulation is generally designed to shift the tax burden to higher-income taxpayers. Shameful.

Not all COLA adjustments have been released yet, partly due to the current government shutdown. As numbers are finalized, we will report and comment in upcoming Blogs. We already mentioned the new tax bracket changes.

Significant changes for 2026 include a new process for deducting State and Local Taxes, or SALT, which had been limited since 2018 to $10,000 annually. For 2026, the SALT limit has been raised to $40,000, although the additional amount gets phased out at higher income levels. The net result affects very few taxpayers and does not address inflation for the rest of us.

Thanks to passage of the OBBBA, year-end 2025 tax planning is easier this year than most. Too often, Congress delays finalization of taxation rules until they are scrambling to catch their planes for the Holiday break. This leaves planners in a last-minute rush to do their best for clients.

We already know that Social Security recipients will receive a paltry 2.8% increase in monthly benefits, and that Medicare Parts B and D will cut into that increase. Hopefully, better news will be available in the near future.