1.1. Annual Inflation & Cost-of-Living Adjustments
Lesson 1.1 — Annual Inflation & Cost-of-Living Adjustments · TY2026 (Filed 2027)
Every fall the IRS releases inflation-adjusted figures for more than 60 tax provisions. Revenue Procedure 2025-32 (IR-2025-103, October 9, 2025) contains the official TY2026 amounts used on returns filed in 2027. This lesson covers four key subsections plus the major tax figures every preparer must know.
How the Index Works — IRC §1(f)
Most adjustments are calculated using the Chained Consumer Price Index for All Urban Consumers (Chained CPI-U). Unlike the traditional CPI-U, the chained version accounts for consumer substitution behavior, resulting in slightly smaller annual increases. Amounts are rounded to the nearest statutory increment (varies by provision). If inflation does not produce a sufficient change, the amount stays the same as the prior year.
Official 2026 Federal Income Tax Brackets (Rev. Proc. 2025-32)
|
Tax Rate |
Single Filers |
Married Filing Jointly (or Qualifying Surviving Spouse) |
Married Filing Separately |
Head of Household |
|---|---|---|---|---|
|
10% |
$0 to $12,400 |
$0 to $24,800 |
$0 to $12,400 |
$0 to $17,700 |
|
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 |
Annual Inflation & Cost-of-Living Adjustments for TY2026
- Identify the inflation-adjusted items that matter most on individual returns.
- Apply the updated educator expense, student loan interest, foreign earned income, and gift exclusion amounts.
- Recognize when inflation adjustments change planning but do not create a new deduction.
1.1.1 — Certain Expenses of Elementary & Secondary School Teachers
IRC §62(a)(2)(D) · Rev. Proc. 2025-32(.12)
Eligible K–12 educators may deduct unreimbursed classroom expenses as an above-the-line deduction on Schedule 1. This deduction reduces AGI whether or not the taxpayer itemizes.
Who Qualifies — All Must Apply
Works as a teacher, instructor, counselor, principal, or aide in a K–12 school
Works at least 900 hours during the school year
Expenses are unreimbursed and paid out of pocket
What Expenses Qualify
Books, supplies, and materials used in the classroom
Computer equipment and software used in the classroom
Professional development courses related to the curriculum taught
PPE and COVID-19 prevention supplies used in the classroom qualify
Home schooling expenses do not qualify — must be a regular K–12 school
1.1.2 — Interest on Education Loans
IRC §221 · Rev. Proc. 2025-32(.29)
Taxpayers who paid interest on a qualified student loan may deduct up to $2,500 as an above-the-line deduction on Schedule 1. The deduction phases out based on modified AGI and is completely eliminated at the upper threshold. It is not available to taxpayers who are claimed as dependents or who are MFS.
Key Rules
Interest must be on a qualified student loan — taken out solely to pay qualified higher education expenses for the taxpayer, spouse, or a dependent at the time the debt was incurred
Not available if the taxpayer is claimed as a dependent on someone else’s return
Lenders report interest paid of $600+ on Form 1098-E
1.1.3 — Foreign Earned Income Exclusion
IRC §911 · Rev. Proc. 2025-32(.39) · Form 2555
U.S. citizens and resident aliens who live and work abroad may exclude a portion of their foreign earned income from U.S. gross income. The exclusion is claimed on Form 2555. The taxpayer must meet either the bona fide residence test or the physical presence test.
Important — FEIE Does Not Eliminate SE Tax
The FEIE excludes foreign earned income from income tax only. Self-employed taxpayers living abroad still owe self-employment tax on net self-employment income — the exclusion does not reduce the SE tax base. Additionally, the exclusion is a choice — if not elected on a timely return, the taxpayer must re-elect and may face a 5-year waiting period.
1.1.4 — Annual Exclusion for Gifts
IRC §2503(b) · Rev. Proc. 2025-32(.42) · Form 709
The annual gift tax exclusion allows a donor to give up to a specified amount to any number of individuals each year without filing Form 709 or reducing the unified lifetime exemption. Gifts above the annual exclusion per recipient require a Form 709 filing.
Key Gift Tax Rules
The exclusion is per recipient — a donor can give $19,000 to as many people as desired with no gift tax consequence
Gift splitting — married couples may elect to treat a gift as made half by each spouse, effectively doubling the exclusion to $38,000 per recipient. Both spouses must consent on Form 709.
Direct payments for tuition (to the school) or medical expenses (to the provider) are excluded without limit and do not count against the annual exclusion — IRC §2503(e)
The unified lifetime exemption increased to $15,000,000 for TY2026 (up $1,010,000 from TY2025’s $13,990,000) — gifts over the annual exclusion reduce this exemption
Worked Example — Gift Splitting
Victor and Linda want to give their son $38,000 in TY2026. Victor writes a check for $38,000. They elect gift splitting on Form 709 — each spouse is treated as having given $19,000. The entire $38,000 is covered by the annual exclusion. No gift tax. No lifetime exemption used.
Complete TY2026 Inflation Reference — All Numbers Verified from IRS.gov