Inflation Adjustment of Tax Brackets Almost Zero for Next Year

 
 
September 16, 2009

Fiscal Fact No. 188

Introduction

Today, the Bureau of Labor Statistics (BLS) released its August estimate of the Consumer Price Index (CPI). That August figure is the final statistic used by the IRS in calculating important tax parameters for tax year 2010. Even though these tax returns won't be filed until spring 2011, this information is necessary because employers will use these parameters to estimate withholding in 2010.

The numbers released today indicate that this year will mark the smallest inflation adjustment on record (since the IRS began adjusting tax parameters for inflation on an annual basis in the mid-1980s). While last year saw some of the largest year-over-year increases in most inflation-adjusted tax parameters (4.26%), year-over-year inflation for the purposes of this year's adjustment was less than 0.2 percent (see Table 1 below).

How the IRS Calculates Inflation Adjustment

The IRS uses the average CPI-U monthly value from the previous 12 months (September through August) and compares it to a "base year" CPI-U average for each tax variable. Here's a simple example:

For the personal exemption (base year of 1988), the initial personal exemption value was $2,000 in a year with a 12-month CPI-U average of 116.61666 (period of Sept. 1987 through Aug. 1988). Given this morning's BLS release, the average CPI-U value for the 12-month period of Sept. 2008 through Aug. 2009) will be 214.0023. Therefore, the ratio of the 2009 CPI-U average to the 1988 CPI-U average equals 1.83509, and we multiply that ratio by $2,000 (the initial personal exemption amount) in order to obtain our amount for tax year 2010. (Note that the IRS rounds most tax parameters down to the nearest $50.)

This procedure is done to all inflation-adjusted tax parameters, albeit some with different "base years" than others. For example, the base year for the 10% bracket is 2002.

Smallest Adjustment Since Inflation Adjustments by IRS Began

Table 1 shows the annual inflation rates for every year since inflation adjustments became part of the individual income tax in the mid-1980s. As one can see, the past two years are two extremes: one high and one low. That means last year, tax parameters like the standard deduction and tax brackets increased substantially in value, while this year, they are either increasing very little or not at all. For workers, this means they won't receive as large an increase in take-home pay this January as they did last January given the automatic inflation adjustments (assuming pre-tax wages stay the same).

Tax Year Adjustment

Inflation Rate

1984-85

3.99%

1985-86

3.78%

1986-87

2.57%

1987-88

2.64%

1988-89

4.14%

1989-90

4.74%

1990-91

4.84%

1991-92

5.28%

1992-93

3.05%

1993-94

3.06%

1994-95

2.60%

1995-96

2.84%

1996-97

2.76%

1997-98

2.74%

1998-99

1.69%

1999-00

1.82%

2000-01

3.11%

2001-02

3.29%

2002-03

1.59%

2003-04

2.28%

2004-05

2.30%

2005-06

3.11%

2006-07

3.90%

2007-08

2.29%

2008-09

4.26%

2009-10

0.19%

The previous lowest annual inflation amount (as measured by changes in 12-month CPI average) was 1.59 percent. That was following the previous recession. But it's not even close to the near-zero inflation for 2009-10.

Projected Inflation Parameters for 2010

In the tables below, we present our projected amounts for each of the major tax parameters for tax year 2010, including every taxable income bracket threshold, personal exemption, standard deduction, and phase-in and phase-out ranges for the limitations on personal exemptions and itemized deductions. The IRS will release its official figures later this fall, but rarely are there any differences and never anything significantly different.

As one can see from the table, the personal exemption will remain unchanged for this year, along with the standard deduction for some taxpayers. This marks the first time that no increase in these parameters has taken place.

Tax Parameter

Tax Year 2010 Amount

Tax Year 2009 Amount

     

Standard Deduction - Singles

5,700

5,700

Standard Deduction - Married Filling Jointly (MFJ)

11,400

11,400

Standard Deduction - Head of Household (HOH)

8,400

8,350

Standard Deduction - Married Filing Separately (MFS)

5,700

5,700

     

Personal Exemption

3,650

3,650

     

10% Rate - Single

0

0

15% Rate - Single

8,375

8,350

25% Rate - Single

34,000

33,950

28% Rate - Single

82,400

82,250

33% Rate - Single

171,850

171,550

35% Rate - Single

373,650

372,950

     

10% Rate - MFJ

0

0

15% Rate - MFJ

16,750

16,700

25% Rate - MFJ

68,000

67,900

28% Rate - MFJ

137,300

137,050

33% Rate - MFJ

209,250

208,850

35% Rate - MFJ

373,650

372,950

     

10% Rate - HOH

0

0

15% Rate - HOH

11,950

11,950

25% Rate - HOH

45,550

45,500

28% Rate - HOH

117,650

117,450

33% Rate - HOH

190,550

190,200

35% Rate - HOH

373,650

372,950

     

10% Rate - MFS

0

0

15% Rate - MFS

8,375

8,350

25% Rate - MFS

34,000

33,950

28% Rate - MFS

68,650

68,525

33% Rate - MFS

104,625

104,425

35% Rate - MFS

186,825

186,475

     

Phaseout of Itemized Deductions Begins (AGI)
Single, MFJ, HOH

N/A* (167,100)

166,800

Phaseout of Itemized Deductions Begins (AGI)
MFS

N/A* (83,550)

83,400

     

Phaseout of Personal Exemptions Begins (AGI)
Single

N/A* (167,100)

166,800

Phaseout of Personal Exemptions Begins (AGI)
MFJ

N/A* (250,650)

250,200

Phaseout of Personal Exemptions Begins (AGI)
HOH

N/A* (208,850)

208,500

Phaseout of Personal Exemptions Begins (AGI)
MFS

N/A* (125,325)

125,100

*The phase-out of personal exemptions and the phase-out itemized deductions are repealed in 2010, but come back at regular levels in 2011 and thereafter. The numbers in parentheses represent what the levels would be if the phase-out were still in effect for 2010.

   

Follow Us

Tax Policy Blog

The official weblog of the Tax Foundation.

Go

Tax By State

For information on your state, select it from the drop-down menu.

 

Ask a Tax Expert

Contact information for Tax Foundation policy staff Ask