Each year, the Internal Revenue Service (IRS) adjusts its various tax rates due to inflation. This stops what is known as the "bracket creep". A bracket creep happens when tax rates are not adjusted and people are pushed to the bracket suitable for high income earners, when their spending power is actually not that high. The 2016 federal tax rates, like each year, have been set following the Consumer Price Index (CPI). And, like each year, they have been adjusted related to a certain base year.

Understanding 2016 Federal Tax Rates:

The 2016 federal tax rates dictated that the top income, which is charged at 39.6% for single filers is $415,050 and higher; or $466,950 or higher for filers who are married.

The IRS has also adjusted the standard deduction and personal exemption. No increase has been made for joint filing married couples, or single individuals. However, for heads of households, it has increased by $50 and will stand at $9,300. In terms of the personal exemption, it will be $4,050 for 2016.

The IRS also has the Pease and PEP provision, which increases the taxable income for those who earn a lot. The income threshold for both provisions now stands, for single filers at $259,400, and for joint filers at $311,300. For single filers, PEP ends at $381,900 and for married couples at $433,800. What this means is that there will no longer be a personal exemption for these taxpayers.

Then, there is the Alternative Minimum Tax (AMT), which was created in the 1960s. It has never been adjusted for inflation yet. As such, Congress found itself having to "patch" the 2016 AMT by raising the permitted exemption amount. In so doing, they avoided taxpayers in middle class earning brackets from being hit with a higher tax. Income thresholds were indexed to inflation by the American Taxpayer Relief Act of 2012 on January 2, 2013. This meant that an annual "patch" was no longer required. In 2016, the AMT amount for single filers is $53,900 and for joint filers is $83,800.

The next issue is earned income ta credit, which is set at $506 for joint filers, heads of households, and singles, so long as there are no children in the household. If there are children, it is $3,373 for one child, rising to $5,572 for two, and, finally, $6,268 for more.

How Inflation Affects Taxes:

Every parameter of tax is adjusted in line with inflation by looking at its legislated base value, multiplied by the average CPI for that year, divided by the CPI for the base year. It is then rounded to the nearest $10, $25, or $100.

Taxes are hugely complex, which is why it is so important for people to seek professional advice when it comes to filing. Having a baseline of knowledge on how inflation affects taxes; however, is very important to give you an idea of what to expect. However, when in doubt, speak to an accountant.