Chained CPI and Your Taxes

Tax legislation signed at the end of 2017 made dramatic changes to the U.S. tax code for corporations and individuals. One of the most fundamental changes — a new way of measuring inflation — received relatively little attention but could have a significant effect on your taxes over the long term.

A number of key tax provisions are indexed for inflation. These include the income thresholds for tax brackets, standard deduction amounts, retirement plan contribution limits, and many more. Since the 1980s, the measure used to make adjustments has been the Consumer Price Index for all Urban Consumers (CPI-U). Beginning in 2018, the measure will be the Chained Consumer Price Index for All Urban Consumers (C-CPI-U).

Both indexes measure changes in the price of a market basket of goods and services. However, they differ in the way they capture consumer behavior in response t