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# How Do Tax Inflation-Adjustments Work?

“Could you please discuss how the inflation adjustments in the tax code work? I know that they now rely on chained CPI rather than regular CPI, but when I try the math on my own I do not get the same results as the official numbers.”

The general approach is to:

1. Multiply the dollar amount specified in the relevant Code provision by a percentage (which is essentially the inflation that has occurred in the years since the provision went into effect), then
2. Round to a multiple of a given dollar amount.

As the reader noted in his email, such calculations now use the Chained Consumer Price Index For All Urban Consumers (C-CPI-U) rather than the regular CPI-U, with the result generally being smaller inflation adjustments than we would have seen otherwise.

Let’s look at an example.

For the tax brackets that apply from 2018-2025, the inflation adjustment for any year beginning in 2019 is the percentage by which:

• the C-CPI-U for the preceding calendar year, exceeds
• the C-CPI-U for calendar year 2017.

Of note: when we refer to the C-CPI-U “for a given year,” we’re talking about the average such figure for the 12-month period ending in August of that year. For example, the C-CPI-U for 2018 would be the average of the C-CPI-U figures from September 2017-August 2018.

So if we want to calculate the inflation adjusted tax brackets for 2019, we first find the average C-CPI-U from September 2016 – August 2017. That figure was 138.237. And the average Chained CPI-U for September 2017 – August 2018 was 141.078. Then we divide 141.078 by 138.237 to get 1.02055. This tells us that our tax bracket thresholds will each be increased by 2.055%, before rounding.

### Rounding

After the above math is performed, the applicable figure is then rounded. The rounding rules vary from one provision to another. For instance, IRA contribution limits are rounded down to the next lower multiple of \$500, whereas the income limits for Roth IRA contributions are rounded (up or down) to the nearest multiple of \$1,000.

With some tax provisions, it’s common for the rounding rules to prevent us from seeing any change in many years. For instance, the IRA contribution limit was stuck at \$5,500 from 2013-2018. Even though we had inflation over that period, it wasn’t enough to push the contribution limit over the next \$500 threshold — until this year. (The limit will be \$6,000 for 2019.)

### Some Things Get No Inflation Adjustments

Finally, it’s worth noting that there are also an assortment of figures that don’t get an inflation adjustment at all (e.g., catch-up contribution limit for IRAs, or the thresholds for Social Security taxability).

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