The IRS has announced updated federal tax brackets for 2026. These annual inflation adjustments can affect how much of your income is taxed at each rate — and ultimately, how much you will owe when you file.
While tax brackets may seem straightforward, they’re often misunderstood. For example, let’s assume you’re single, and your total gross income in 2025 was $120,000. As shown in the tax bracket chart below, $120,000 falls within the income range for a 24% tax rate. However, that doesn’t mean you will have a 24% tax liability on your total gross income and owe the IRS $28,800.
That’s because the U.S. uses a progressive tax system, where income is taxed in layers — not all at at the marginal rate. You pay taxes at each bracket along the way, with higher income resulting in higher rates on the last dollars earned. In addition, you can take deductions to reduce your gross income amount, making your actual tax rate, known as the effective rate, much lower than 24%. Plus, every year the U.S. tax system undergoes annual inflation adjustments that have an impact on tax brackets, standard deductions, retirement contributions, and more.
Let’s break down how tax brackets work and what the 2025 and new 2026 IRS brackets could mean for your tax planning.
How U.S. tax brackets work
Using the example above, with you being a single filer earning $120,000 in gross income in 2025. In addition, you contributed 10% of your income to a 401(k) ($12,000) and took the standard deduction for tax year 2025 ($15,750). You’ve already adjusted your taxable income by $27,750 to $92,250. For simplification, this example has no other deductions.
Therefore, the first $11,925 of your income will have a tax rate of 10% ($1,192.50), the next $36,550 will have a tax rate of 12% ($4,386), and the final $43,775 will have a marginal tax rate of 22% ($9,630.50). Your marginal tax rate, as opposed to the effective tax rate (shown below), is 22%. That is the tax rate on the next dollar of income.
Now, add together the tax owed of $1,192.50, $4,386, and $9,630.50, and it equals $15,209. Divide by your gross income of $120,000, and you get an effective tax rate of 12.67%, close to half of the 24% that appeared to be taxable just by looking at the chart at face value.
That’s why your marginal tax rate — the rate on your last dollar of income — is often much higher than your effective tax rate, which reflects what you actually pay overall. In other words, tax brackets are applied progressively, not retroactively.
2025 tax rates
| Tax rate | Single filers | Married couples filing jointly | Married couples filing separately | Head of household |
| 10% | $11,925 or less | $23,850 or less | $11,925 or less | $17,000 or less |
| 12% | $11,926 to $48,475 | $23,851 to $96,950 | $11,926 to $48,475 | $17,001 to $64,850 |
| 22% | $48,476 to $103,350 | $96,951 to $206,700 | $48,476 to $103,350 | $64,851 to $103,350 |
| 24% | $103,351 to $197,300 | $206,701 to $394,600 | $103,351 to $197,300 | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 | $394,601 to $501,050 | $197,301 to $250,525 | $197,301 to $250,500 |
| 35% | $250,526 to $626,350 | $501,051 to $751,600 | $250,526 to $375,800 | $250,501 to $626,350 |
| 37% | Over $626,350 | Over $751,600 | Over $375,800 | Over $626,350 |
Source: Internal Revenue Service
2026 tax rates
| Tax rate | Single filers | Married couples filing jointly | Married couples filing separately | Head of household |
| 10% | $12,400 or less | $24,800 or less | $12,400 or less | $17,700 or less |
| 12% | $12,401 to $50,400 | $24,801 to $100,800 | $12,401 to $50,400 | $17,701 to $67,450 |
| 22% | $50,401 to $105,700 | $100,801 to $211,400 | $50,401 to $105,700 | $67,451 to $105,700 |
| 24% | $105,701 to $201,775 | $211,401 to $403,550 | $105,701 to $201,775 | $105,701 to $201,750 |
| 32% | $201,776 to $256,225 | $403,551 to $512,450 | $201,776 to $256,225 | $201,751 to $256,200 |
| 35% | $256,226 to $640,600 | $512,451 to $768,700 | $256,226 to $384,350 | $256,201 to $640,600 |
| 37% | Over $640,600 | Over $768,700 | Over $384,350 | Over $640,600 |
Source: Internal Revenue Service
Why inflation adjustments matter
Each year, the IRS uses the Consumer Price Index for All Urban Consumers (CPI-U) to adjust tax brackets for inflation. These changes help prevent “bracket creep” (unintentional movement into a higher tax bracket) and incentivize individuals to pursue higher incomes and contribute to economic growth. This, in turn, supports a dynamic and thriving economy. For example, if you got a 5% raise on your $120,000 income to $126,000, contributed 10% to your 401(k) of $12,600, and took the standard deduction for 2026 of $16,100, your taxable income would be $97,300, and your marginal tax rate is still 22% as it was in 2025.
That’s good news for taxpayers because inflation-adjusted brackets help ensure that raises meant to keep up with the cost of living don’t automatically result in higher tax bills. For example, a modest raise combined with retirement contributions and the standard deduction could keep your marginal tax rate unchanged, even as your income increases.
Inflation-adjusted tax brackets provide greater predictability for taxpayers and tax planners. You can better anticipate your tax liability and plan accordingly to achieve financial stability and long-term goals.
The limitation of inflation adjustments
While inflation indexing improves fairness, it isn’t perfect. The CPI-U may not capture the specific inflation experience of all individuals or demographic groups, potentially leading to variations in the impact of these adjustments. Our example with fictional salary and deductions shows the stability that adjusted tax brackets can provide as well as the vulnerability of certain income levels to higher tax rates.
Additionally, broader tax policy changes, deductions, and credits can either amplify or offset the benefits of bracket adjustments. Understanding how these moving parts work together is essential for proactive tax planning.
Inflation adjustment is a vital mechanism helping to ensure the tax system remains fair and equitable during periods of economic change. Understanding the complexities of the tax code and the implications of inflation adjustment can help you make sound financial decisions.
Planning with the full picture in mind
For more information, our Quick Guide to 2026 IRS Tax Changes and Inflation Adjustments article pulls together the most important IRS updates — from tax brackets to retirement limits — to support smarter tax planning.
At Mercer Advisors, tax planning is integrated into your broader financial strategy, alongside investment management, estate planning, and insurance solutions. Tax preparation services are also available. Contact your wealth advisor for more information. Not a Mercer Advisors client? Let’s talk.
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