High inflation has led state and federal authorities to make larger than usual changes to income tax brackets for the coming year.
Tax agencies in the United States and Minnesota have raised the floor of the brackets that determine the tax rate on wages and other personal income. In response to the highest inflation in decades, bracket adjustments are significant – more than 7% versus increases of 1% to 3% in recent years.
“This is the highest adjustment we’ve made since probably the early 1980s,” said Eric Willette, research director at the Minnesota Department of Revenue.
The annual exercise doesn’t usually get a lot of notice, except from tax professionals. But the size makes this one different because not going that far could have meant a sting for later declarers.
Total wage income in Minnesota grew 7.2% in 2021 and was on track to rise 6.9% this year, according to the state’s updated economic forecast. For next year, the annualized bump is expected to decline to 4.5%.
“As people’s income increases over time to account for inflation, more of their income would be in the higher brackets. Often, “bracket creep” is the term used for this phenomenon. And that was the reason for creating the indexation law in the first place,” Willette said.
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Without the automatic annual review and adjustment, Minnesota lawmakers would have to pass a new bill each year.
Due to the progressive tax system in place, the revised brackets mean that a greater amount of income will be taxed at lower rates.
For people whose wages remain static, this could reduce tax liability and reduce what they ultimately owe in taxes. But for people who see big raises, merit pay, or other increases in income, it could be a wash.
“You absolutely have to look at it on a case-by-case basis,” said accountant Steve Warren of Schecter Dokken Kanter. He said most years the adjustments are in line with an “objective of the government, which is” to try to adjust the brackets so that you pay roughly the same tax on roughly the same amount of taxable power. purchase you have from year to year.
For example, a married couple filing a joint return will see up to $174,610 of their taxable income fall into the first or second tax bracket in 2023. The first quarter of that income is taxed at a rate of 5, 35%; the rest at 6.8 percent.
Currently, that same family would be in a higher tax bracket on incomes over $163,060.
Minnesota’s third tax bracket assesses a 7.85% tax on income in this segment. The fourth and highest tax rate is 9.85%.
Standard deductions and dependent exemptions will also increase. The standard deduction will be $13,825 for single filers and $27,650 for married joint filers. The dependent exemption is increased from $4,450 to $4,800 currently.
So what should taxpayers do to account for it?
“The whole point of these slice changes is so that most people don’t have to do anything,” Warren said, cautioning against quick moves to adjust retainers.
He added: “But you still have to watch it on an individual basis. Some people have other changes: merit pay, raise, change of hours, addition of a second job, changes in investment portfolio income. All of these things are important in determining how much you should pay the government in taxes.
The tranche adjustments impact Minnesota’s projected revenues in the future. According to a budget forecast released this week, tax payable is reduced by $100 million for fiscal year 2024 and $318 million for the following year.
The Federal Reserve has attempted to control inflation by raising interest rates, which increases the costs associated with auto loans, mortgage rates for home purchases, and credit card finance charges.
But it is also advantageous for people and entities with bank savings.
As services and goods provided by the Minnesota government have become more expensive, the state stands to reap millions of dollars from the money it has set aside.
The state’s rainy day reserve hit a record high of $2.85 billion, and a cash account of $350 million is also earning interest.
State Economist Laura Kalambokidis said Minnesota’s total investment income will be about $165 million for the budget that runs this summer and another $700 million for the two years after that.
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