The IRS Is Adjusting Tax Brackets for 2026—and First-Time Buyers Stand To Benefit

As summer fades, the housing market is shifting too—and this time, the momentum may be tilting toward buyers. For the first time in years, conditions are aligning to give first-time homebuyers a better shot. Seven major metros are now officially in a buyer's market, according to the latest monthly housing market trends report from Realtor.com®. An additional 23 are perfectly balanced, meaning that while buyers don’t necessarily have the upper hand, they certainly have more leverage than they’ve had in years.

And now, another factor may be tipping the scales in their favor: The upcoming expected inflation adjustments to the IRS’ tax brackets for 2026.

These new changes are expected to be officially released in October or November, but Bloomberg Tax released projections that clock generous bracket increases, particularly for low- and middle-tier earners. 

Inflation adjustments mean higher income thresholds, possibly lowering the effective taxes for millions. That boost to take-home pay could go a long way toward offsetting the rising cost of living and give buyers the wiggle room they need in their budget to finally break into the market.

How tax brackets work (and why they matter for real estate)

Your income isn't taxed at a flat rate. Instead, your earnings are divided into brackets, and each portion of your income is taxed at its own rate. 

You’ll often hear terms like "marginal" or “effective” tax rates when breaking down income tax to help capture the cumulative effects of these brackets. While your marginal tax rate is the rate that applies to the last dollar you earn, your effective tax rate is the overall percentage of your income that goes to the IRS.

For example, let’s assume you’re filing taxes in 2025 as a single filer on a $100,000 salary. The first $11,925 of your income would be taxed at 10%, your income from $11,926 to $48,475 would be taxed at 12%, and the rest would be taxed at 22%. Your marginal tax rate is 22%, but your effective tax rate is closer to 16%.

If you earned $200,000, the same structure applies, but the income from $103,351 to $197,300 would be taxed at 24%, and only the final few thousand, from $197,301 to $200,000, would be taxed at 32%. In this case, your marginal tax rate would be 32%, while your effective tax rate would be just over 20%.

As you can see, most households’ effective rate is much lower than their top bracket. That means inflation adjustments don’t just help at the margins—they reduce the overall share of income going to taxes, leaving buyers with more room in their budgets for mortgages and closing costs.

2026 adjustments to watch for

Inflation has been a headache for the Federal Reserve, forcing it to keep interest rates higher than many would like. But the same inflation that pressures borrowing costs also works in taxpayers’ favor when the IRS resets its brackets.

For 2026, the IRS is expected to raise bracket thresholds by about 2.7%, with the lowest brackets getting an even larger 4% bump as a result of provisions in the One Big Beautiful Bill Act.

The goal is to prevent “bracket creep,” says Elliot Schwartz, a finance expert and CEO at Becca’s, a company that helps people build their credit.

“Tax brackets adjusted for inflation help shield families from bracket creep, meaning that having small raises won’t push them into a higher tax bracket,” he says.

For example, if an employee making $64,000 got a 3% cost of living raise in 2025, bringing their income to $65,920, assuming a standard deduction of $15,750, their marginal tax rate would jump from 12% to 22%. Even their effective tax rate would get a slight bump from 11.51% to 11.86%.

The benefits can be more significant for those in the lowest brackets, adds Schwartz. For them, he says, “This is a modest increase in take-home pay that gives them some wiggle room in their budgets each month.”

But it's important to note that the brackets are changing for a reason: The cost of living has gone up. Inflation adjustments aren’t necessarily meant to give taxpayers more disposable income, but to help offset those rising prices, and not penalize any employers and employees for getting a cost of living adjustment. That makes the 2026 changes less of a tax cut and more of a reset. Still, for first-time buyers, even a small boost in take-home pay can translate into a little extra room for saving toward a down payment or qualifying for a mortgage.

Another major break for first-time homebuyers may be the fact that overtime and tips will see generous tax breaks, says Aaron Razon, a personal finance expert at Couponsnake.

“Let's face it, for some groups, overtime and tips make up a significant portion in their income, so tax relief on this income can make a lot of difference,” he says. 

Lower taxes on this income could put more money back into the pockets of these earners, increasing their disposable income, and making it easier to qualify for a mortgage.

Standard deduction and itemizing: What it means for buyers

For years, one of the most-touted perks of homeownership was the tax break. Deducting mortgage interest and property taxes could make a meaningful difference in what you owed the IRS each spring. But with the temporary increase to the standard deduction now permanent under the OBBBA, that math is set to change.

Many first-time buyers are likely to find that their mortgage interest and property taxes don’t add up to more than the standard deduction. That makes them more likely to take the simple flat deduction and move on. While that option is poised to make filing faster and easier, it also means the immediate “tax write-off” from buying a home isn’t as powerful as it once was.

That’s not necessarily bad news. It just means the real payoff of homeownership won’t be found on your next tax return. Instead, you’ll need to look at the long game: building equity, stabilizing your housing costs, and creating wealth over time.

If you live in a high-tax state like New York, New Jersey, or California, though, itemizing might make sense thanks to new generous limits in the state and local tax (SALT) deductions. In New Jersey, 40% of homeowners pay more than $10,000 in property taxes alone. But under the new $40,000 SALT cap, that number will plummet to just 1.6%.

Planning ahead as a first-time buyer

Tax bracket shifts aren’t dramatic windfalls, but they can still shape your buying power especially as the national market resets.

“For first-time buyers, this higher income can create a small improvement when saving for a down payment or towards meeting debt-to-income ratios,” says Schwartz. “The difference might also be negligible when it comes to affordability, but every bit of extra cash flow as they qualify for a mortgage is valuable.”

If you’re looking to break into the market in 2026, start by forecasting your projected take-home income. Use these projections to get on a savings plan for your down payment, and start looking at ZIP codes where the market may be softening.

While Schwartz doesn’t expect the changes to make a major difference for buyers, Razon is more optimistic.

“The truth is that we are living in an economic situation where every dime and penny counts,” he says. “This modest boost in take-home pay really does make a difference in today's affordability challenges."