Understanding the New Inflation Adjustments
In October 2025, the IRS released Revenue Procedure 2025-32, detailing the inflation adjustments for over 60 tax provisions for tax year 2026, including enhanced standard deductions, upward-adjusted rate brackets, and higher exclusion thresholds.(irs.gov) Significant increases include: the standard deduction rising to $32,200 (MFJ), $24,150 (HoH), and enhanced exemption for estates to $15 million.(irs.gov)
Strategy 1: Review Income Timing and Bracket Placement
With rate brackets shifting upward, some income that would have pushed you into a higher tax bracket now may not. Consider:
- Accelerating or delaying income (bonuses, capital gains) to fall into lower brackets where possible.
- Harvesting capital losses to offset gains, especially if you expect the tax rates in higher brackets to bite less due to inflation indexing.
Strategy 2: Itemize Deductions When Helpful
The standard deduction has increased, making itemizing less attractive—but still valuable under certain circumstances:
- If you have high state and local taxes (SALT), mortgage interest, or charitable giving, itemizing may exceed the standard deduction.
- Consider “bunching” deductions (e.g., charitable gifts) into one year to exceed the new standard deduction.
Strategy 3: Maximize Credits and Exclusions
Some inflation-indexed items offer dollar limits that affect phase-outs and eligibility:
- Foreign Earned Income Exclusion rose to $132,900 in 2026. U.S. expats or nomadic workers abroad should ensure their housing and foreign housing deductions are optimized.(irs.gov)
- Adoption Credits and Childcare-related credits have increased, boosting value for eligible taxpayers.(irs.gov)
Practical Example
Jane, a married couple filing jointly, expects $40,000 in charitable giving, $40,000 in mortgage interest & SALT, totaling $80,000 itemized deductions. With the 2026 standard deduction at $32,200, itemizing clearly benefits them. Pandemic era timing (bunching giving in alternate years) could further amplify savings.
Action Points
- If you expect income to spike, consult with a tax advisor early to determine if accelerating or deferring income makes sense.
- Review your deductions to see whether traditional itemization still beats the standard deduction.
- Expats should re-examine FEIE eligibility and make sure housing costs are properly documented for deductions.
- High earners should be aware of phase-outs—for example, the Alternative Minimum Tax exemption thresholds have been raised, but with phase-outs starting at higher income levels.(irs.gov)