Everyday Economics: Tax changes can cushion inflation but can't restore lost purchasing power

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(The Center Square) – The Internal Revenue Service’s new inflation adjustments would save a married couple earning $87,500 about $136 next year, or $11 a month, assuming their income stays unchanged. That modest relief illustrates the limits of tax changes when higher prices are squeezing household budgets.

That is my calculation using the IRS tax schedules for 2026 and 2027, before tax credits. It assumes the couple files together, has $87,500 in adjusted gross income, earns ordinary income only and takes the basic standard deduction. That income is roughly the Census Bureau’s national median of $87,460 for all households in 2025, not the median for married couples. Census household income and tax-return income are different measures.

The IRS announced the changes Nov. 5. For 2027 income, generally reported on returns filed in early 2028, the standard deduction rises to $16,600 for single filers and $33,200 for married couples filing together. This is the amount people subtract before calculating their income tax. People can also earn more before higher tax rates apply.

The benefit can arrive during 2027. Employers use IRS withholding tables to calculate how much tax to take from paychecks. Updating those tables for the new limits can leave workers with more take-home pay before they file their returns.

The purpose is to prevent a raise that merely covers higher prices from pushing up a family’s tax burden. But the adjustment looks backward: federal law bases the 2027 calculation on inflation data through August 2026. Faster price increases afterward will not trigger another increase in the 2027 limits.

That gap matters now. The Bureau of Labor Statistics reported that the seasonally adjusted gasoline index rose 9.1% in September, accounting for more than half the monthly rise in consumer prices. Before adjustment for seasonal patterns, gasoline prices rose 6.5%. Gasoline normally gets cheaper in September, so seasonal adjustment raises the reported increase. The bureau also reported a 0.5% monthly decline in inflation-adjusted hourly pay.

Pump prices have eased since late September. The Energy Information Administration’s latest weekly data put regular gasoline at $4.153 a gallon on Nov. 2, down from $4.478 on Sept. 21 but still $1.134 above the comparable week last year. At 40 gallons a month, that annual price difference adds about $45 to a household’s monthly bill, roughly four times the illustrative tax saving. The 40 gallons is an assumption, not average household consumption. October’s report could show gasoline easing even while prices remain high.

Tuesday’s Consumer Price Index and real earnings reports will show October’s monthly changes. But the Bureau of Labor Statistics says it will omit 12-month comparisons where October 2025 indexes are missing because of last year’s government shutdown. That leaves a gap in the annual comparison. 

There is also a change for returns filed this coming spring. Under the One Big Beautiful Bill Act’s charitable deduction rules, people taking the standard deduction can subtract qualifying cash donations made in 2026, up to $1,000 for an individual or $2,000 for a married couple filing together. Gifts to donor-advised funds and most private foundations do not qualify.

For the couple earning $87,500, I calculate that a qualifying $2,000 donation would reduce federal income tax by $240 under the 2026 rules. The donation reduces income taxed at 12%; it does not produce a $2,000 refund. The couple still pays $1,760 after the tax saving.

The law also sets a new limit for people who list deductible expenses instead of taking the standard deduction. Only charitable gifts above 0.5% of adjusted gross income count. With adjusted gross income of $100,000, the first $500 donated does not count. A $2,000 gift leaves a $1,500 charitable deduction, before other limits.

For the federal budget, these tax savings mean less revenue than collecting tax under unchanged thresholds or denying the new donation deduction, all else equal. The household examples are not estimates of the law’s total budget cost.

The Energy Information Administration’s October 2026 Short-Term Energy Outlook, released Oct. 6, links higher fuel prices to oil costs and tight fuel markets. The agency estimated that Middle East oil exports rose in September despite attacks on infrastructure and shipping. Supply was recovering, but tight fuel supplies kept pressure on prices.

The policy argument follows from those findings: Washington should focus on easing energy supply constraints, while recognizing that Congress has limited direct control over Middle East shipping. Lasting relief will be harder while the conflict threatens energy flows. Federal Reserve Bank of New York research also finds that tariffs raise prices for imported and American-made goods. Reducing those added costs is another way to help tax relief go further.