The Internal Revenue Service (IRS) has announced its annual inflation adjustments for tax year 2026, impacting over 60 tax provisions. These changes, outlined in Revenue Procedure 2025-32, will apply to tax returns filed in 2027 and reflect both routine inflation indexing and legislative updates from the One Big Beautiful Bill Act (OBBB). For taxpayers, financial planners, and tax professionals, understanding these updates is essential for effective year-end planning and long-term strategy.
Standard Deduction Increases
One of the most notable changes is the increase in the standard deduction:
- Married filing jointly: $32,200 (up from $31,500 in 2025)
- Single and married filing separately: $16,100 (up from $15,750)
- Head of household: $24,150 (up from $23,625)
These increases offer modest relief to taxpayers by reducing taxable income thresholds, especially important in an inflationary environment.
Updated Tax Brackets for 2026
The top marginal tax rate remains at 37%, but income thresholds have shifted upward:
37%: Over $640,600 (single) / $768,700 (married filing jointly)
35%: Over $256,225 / $512,450
32%: Over $201,775 / $403,550
24%: Over $105,700 / $211,400
22%: Over $50,400 / $100,800
12%: Over $12,400 / $24,800
10%: Up to $12,400 / $24,800
These bracket shifts are designed to prevent “bracket creep,” where inflation pushes taxpayers into higher tax brackets despite no real increase in purchasing power.
Alternative Minimum Tax (AMT) Adjustments
The AMT exemption amounts have also increased:
- Unmarried individuals: $90,100 (phase-out begins at $500,000)
- Married filing jointly: $140,200 (phase-out begins at $1,000,000)
These changes help ensure that fewer middle-income taxpayers are subject to the AMT, which was originally designed to target high-income earners.
Estate and Gift Tax Updates
For estates of individuals who die in 2026, the basic exclusion amount rises to $15 million, up from $13.99 million in 2025. The annual gift exclusion remains at $19,000, while the exclusion for gifts to a non-U.S. citizen spouse increases to $194,000, up $4,000 from the previous year.
These adjustments are particularly relevant for high-net-worth individuals and estate planners seeking to optimize wealth transfer strategies.
Tax Credits and Benefits
Several credits and benefits have been adjusted for inflation:
- Adoption Credit: Maximum of $17,670 (up from $17,280), with $5,120 potentially refundable.
- Earned Income Tax Credit (EITC): Maximum of $8,231 for taxpayers with three or more qualifying children (up from $8,046).
- Employer-Provided Child Care Credit: Increased dramatically from $150,000 to $500,000, or $600,000 for eligible small businesses under the OBBB.
These changes reflect a broader policy push to support working families and incentivize employer-sponsored benefits.
Fringe Benefits and Flexible Spending
The monthly limits for transportation and parking fringe benefits increase to $340, up $15 from 2025. For health flexible spending arrangements (FSAs), the salary reduction limit rises to $3,400, and the carryover amount increases to $680.
These adjustments help employees manage healthcare and commuting costs more effectively, especially in urban areas where such expenses are significant.
Medical Savings Accounts and Health Coverage
For self-only coverage in medical savings accounts:
- Minimum deductible: $2,900 (up $50)
- Maximum deductible: $4,400 (up $100)
- Out-of-pocket maximum: $5,850 (up $150)
For family coverage:
- Minimum deductible: $5,850 (up from $5,700)
- Maximum deductible: $8,750 (up $200)
- Out-of-pocket maximum: $10,700 (up $200)
These changes reflect modest increases in healthcare costs and aim to maintain the value of tax-advantaged savings.
Foreign Earned Income Exclusion
The foreign earned income exclusion increases to $132,900, up from $130,000 in 2025. This adjustment benefits U.S. citizens working abroad by allowing more income to be excluded from U.S. taxation.
Itemized Deductions and Personal Exemptions
The personal exemption remains at $0, a continuation of the Tax Cuts and Jobs Act of 2017, which was made permanent by the OBBBA. Similarly, the limitation on itemized deductions remains eliminated, except for a cap on the tax benefit for those in the highest tax bracket.
Lifetime Learning Credit
The phase-out thresholds for the Lifetime Learning Credit remain unchanged:
- Single filers: $80,000 to $90,000
- Married filing jointly: $160,000 to $180,000
This lack of adjustment may reduce the credit’s value over time, especially for middle-income earners.
Implications for Tax Planning
The 2026 inflation adjustments offer both opportunities and challenges. While higher deductions and credits provide relief, unchanged thresholds for some benefits (like the Lifetime Learning Credit) may erode their value. Tax professionals should begin incorporating these changes into projections and client strategies now to optimize outcomes for the 2026 filing season.
The IRS’s proactive release of these figures allows for early planning, especially for employers adjusting benefits and individuals considering major financial decisions like adoptions, estate planning, or foreign assignments.
For personalized guidance on how these 2026 inflation adjustments may impact your financial strategy, reach out to your Windham Brannon tax advisor or Kristi Johnson. We can help you navigate the changes and optimize your planning for the upcoming tax year
