APPLETON, Wis. — American workers could see a modest boost to their take-home pay starting in 2026, thanks to inflation-adjusted changes in federal income tax brackets announced by the Internal Revenue Service last fall, combined with new withholding rules stemming from President Donald Trump's recent tax legislation.
The IRS unveiled the updated tax brackets for 2026 in October, reflecting annual adjustments tied to inflation. According to the agency, the income ranges for the two lowest tax brackets — the 10% and 12% rates — expanded by approximately 4% compared to 2025 levels. Higher brackets saw increases of about 2.3%. These shifts also include tweaks to standard deductions, capital gains tax brackets, and various other provisions designed to keep pace with rising costs.
Layered on top of these bracket adjustments are changes to paycheck withholding, influenced by Trump's so-called "big beautiful bill," which was signed into law in July. The legislation permanently extends the 2017 tax cuts from Trump's first term, while introducing enhancements like a boosted standard deduction and an increased child tax credit. It also features several temporary measures, including a bonus deduction for seniors, an expanded state and local tax (SALT) deduction, and exemptions for tips and overtime income.
"Workers will see 2026 paycheck withholding changes layered on top of that," said Garrett Watson, director of policy analysis at the Tax Foundation, a nonpartisan think tank focused on fiscal policy. Withholdings determine how much employers deduct from wages for federal income and payroll taxes, directly affecting the net amount employees receive each pay period.
Many of the provisions in Trump's bill took effect for the 2025 tax year, but the IRS did not update its withholding tables at that time. As a result, paychecks through the end of 2025 largely mirrored previous years, leading experts to predict larger tax refunds for many filers when they submit their 2025 returns in early 2026. "Once 2026 withholdings go into effect, folks will see slightly larger paychecks," assuming their income remains steady from the prior year, according to Andrew Lautz, director of tax policy at the Bipartisan Policy Center.
Lautz cautioned that the difference might be subtle for most. "For most workers, we're talking about a couple of dollars a paycheck, unless you're claiming the tips and overtime deductions," he said, highlighting how the impact varies based on individual circumstances like income level and eligibility for specific breaks.
The mechanics of tax brackets work by applying progressive rates to portions of taxable income, which is calculated by subtracting deductions — either the standard or itemized amount — from adjusted gross income. When brackets widen due to inflation adjustments, individuals can earn more before crossing into a higher tax rate. If a worker's earnings hold steady from 2025 to 2026, this expansion could translate to a small increase in after-tax income.
However, not everyone will notice the change equally. Experts note that some lower- and middle-income earners might benefit more from the bracket shifts and withholding updates, while higher earners could see less relative impact. The adjustments are meant to prevent "bracket creep," where inflation pushes people into higher tax bands without real income growth, but they don't always fully offset personal cost increases.
Watson pointed out that these bracket changes are essentially a "lagging measure of inflation over the prior year." The latest data from the Bureau of Labor Statistics shows the consumer price index, a primary gauge of inflation, rose 2.7% in November 2025 compared to the year before, as reported in December. That's higher than the average adjustment across the 2026 brackets, suggesting the updates might not fully keep up with recent price pressures for all households.
Personal inflation experiences can differ widely, depending on spending patterns. For families heavy on housing, food, or energy costs, the official figures might understate the squeeze, while others in sectors with slower price growth could find the adjustments more aligned. The IRS bases its calculations on broader national trends, but individual realities vary.
Trump's July legislation builds on his 2017 Tax Cuts and Jobs Act, which lowered rates across the board and simplified filing for millions. The new bill locks in those reductions indefinitely, averting their scheduled expiration at the end of 2025. It also amplifies family-friendly elements, such as raising the child tax credit from $2,000 to $2,500 per qualifying child for 2025 and beyond, though some temporary provisions like the tips exemption are set to sunset after a few years.
The senior bonus deduction, for instance, offers an additional $4,000 above the standard deduction for those 65 and older, aimed at easing retirement burdens amid rising healthcare and living expenses. Meanwhile, the expanded SALT deduction cap — raised from $10,000 to $20,000 for joint filers — provides relief in high-tax states like New York and California, where local levies have long been a point of contention.
Implementation of the withholding changes will roll out gradually as employers update their payroll systems in line with IRS guidance expected early in 2026. The agency typically releases new tables in late fall or early winter, giving businesses time to comply before the first paychecks of the year. For 2026, this process is complicated by the overlapping effects of bracket inflation and the legislative tweaks, potentially leading to some initial confusion among workers and HR departments.
Broader economic context adds layers to these developments. With inflation cooling from pandemic highs but still above the Federal Reserve's 2% target, fiscal policies like these aim to support consumer spending without fueling further price spikes. Trump's administration has touted the bill as a win for working families, projecting it could add up to $1,200 annually to average household incomes through combined effects.
Looking ahead, tax experts anticipate ongoing debates over the long-term fiscal impact. The permanent extension of 2017 cuts is estimated to reduce federal revenues by trillions over the next decade, according to projections from groups like the Tax Foundation. Critics argue this could strain budgets for social programs, while supporters emphasize growth spurred by lower taxes.
As Americans file their 2025 returns in the coming months, many may already glimpse the benefits through bigger refunds. But the real test will come with those first 2026 paychecks, offering a tangible sense of how these policy shifts play out in daily life. For now, financial advisors recommend reviewing withholding elections via Form W-4 to ensure they align with new realities, avoiding surprises at tax time.
In Appleton and communities across the Midwest, where manufacturing and service jobs dominate, these changes could provide a welcome buffer against lingering inflationary pressures. Local economists here echo national experts, noting that even small gains in take-home pay can bolster local spending and stability.