Every year, the IRS adjusts more than 40 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
provisions for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
. This is done to prevent what is called “bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation.
.” This is the phenomenon by which people are pushed into higher income tax brackets or have reduced value from credits or deductions due to inflation instead of an actual increase in real income. The IRS uses the Consumer Price Index (CPI) to calculate the past year’s inflation and adjusts income thresholds, deduction amounts, and credit values accordingly. Rather than directly adjusting last year’s values for annual inflation, each provision is adjusted from a specified base year. For more information, see the methodology, below.
Estimated Income Tax BracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressiveindividual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.
s and Rates
In 2015, the income limits for all brackets and all filers will be adjusted for inflation and will be as seen in Table 1. The top marginal income tax rate of 39.6 percent will hit taxpayers with taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
of $413,200 and higher for single filers
and $464,850 and higher for married filers.
Table 1. 2015 Taxable Income Brackets and Rates
Rate
Single Filers
Married Joint Filers
Head of Household Filers
Source: Author’s calculations.
10%
$0 to $9,225
$0 to $18,450
$0 to $13,150
15%
$9,225 to $37,450
$18,450 to $74,900
$13,150 to $50,200
25%
$37,450 to $90,750
$74,900 to $151,200
$50,200 to $129,600
28%
$90,750 to $189,300
$151,200 to $230,450
$129,600 to $209,850
33%
$189,300 to $411,500
$230,450 to $411,500
$209,850 to $411,500
35%
$411,500 to $413,200
$411,500 to $464,850
$411,500 to $439,000
39.6%
$413,200+
$464,850+
$439,000+
Standard DeductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
and Personal Exemption
The standard deduction will increase by $100 from $6,200 to $6,300 for singles (Table 2). For married couples filing jointly, it will increase by $200 from $12,400 to $12,600. The personal exemption for 2015 be $4,000.
Table 2. 2015 Standard Deduction and Personal Exemption
Filing Status
Deduction Amount
Source: Author’s calculations.
Single
$ 6,300.00
Married Filing Jointly
$ 12,600.00
Head of Household
$ 9,250.00
Personal Exemption
$ 4,000.00
PEP and Pease
PEP and Pease are two provisions in the tax code that increase taxable income for high-income earners. PEP is the phaseout of the personal exemption and Pease (named after former Senator Donald Pease) reduces the value of most itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers.
s once
a taxpayer’s adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.”
reaches a certain point. The income threshold for both PEP and Pease will be $258,250 for single filers and $309,900 for married filers (Tables 3 and 4). The PEP phaseout will end at $380,750 for singles and $432,400
for couples filing jointly, meaning these taxpayers will no longer have a personal exemption.
Table 3. 2014 Pease Limitations on Itemized Deductions
Filing Status
Income
Source: Author’s calculations.
Single
$ 258,250.00
Married Filing Jointly
$ 309,900.00
Head of Household
$ 284,050.00
Table 4. 2015 Personal Exemption Phaseout
Filing Status
Phaseout Begin
Phaseout Complete
Source: Author’s calculations.
Single
$ 258,250.00
$ 380,750.00
Married Filing Jointly
$ 309,900.00
$ 432,400.00
Head of Household
$ 284,050.00
$ 406,550.00
Alternative Minimum Tax
Since its creation in the 1960s, the Alternative Minimum Tax (AMT) has not been adjusted for inflation. Thus, Congress was forced to “patch” the AMT by raising the exemption amount to prevent middle class taxpayers from being hit by the tax as a result
of inflation. On January 2, 2013, the American Taxpayer Relief Act of 2012 indexed the income thresholds to inflation, preventing the necessity for an annual patch. The AMT exemption amount for 2015 is $53,600 for singles and $83,400 for married couple
filing jointly (Table 5).
Table 5. 2015 Alternative Minimum Tax Exemptions
Filing Status
Exemption Amount
Source: Author’s calculations.
Single
$ 53,600.00
Married Filing Jointly
$ 83,400.00
Married Filing Separately
$ 41,700.00
Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
2015’s maximum Earned Income Tax Credit for singles, heads of households, and joint filers is $503 if the filer has no children (Table 6). For one child the credit is $3,359, two children is $5,548, and three or more children is $6,242.
Table 6. 2015 Earned Income Tax Credit Parameters
Filing Status
No Children
One Child
Two Children
Three or More Children
Single or Head of Household
Income at Max Credit
$6,580
$9,880
$13,870
$13,870
Maximum Credit
$503
$3,359
$5,548
$6,242
Phaseout Begins
$8,240
$18,110
$18,110
$18,110
Phaseout Ends (Credit Equals Zero)
$14,820
$39,131
$44,454
$47,747
Married Filing Jointly
Income at Max Credit
$6,580
$9,880
$13,870
$13,870
Maximum Credit
$503
$3,359
$5,548
$6,242
Phaseout Begins
$13,760
$23,630
$23,630
$23,630
Phaseout Ends (Credit Equals Zero)
$20,330
$44,651
$49,974
$53,267
Source: Author’s calculations. Each tax parameter is adjusted for inflation by taking its base value (from legislation) and multiplying it by the current fiscal year’s average Consumer Price Index (CPI) and then dividing that by the base fiscal
year’s CPI. Each parameter is rounded to either the nearest $10, $25, or $100 (depending on the specified rounding method in the legislation). For example, the base value for the top of the 10 percent tax bracket for singles is $7,000. This number is
multiplied by the average CPI for fiscal year 2014 (235.69) and then divided by the average CPI for fiscal year 2002 (178.68): $7,000 * (235.69/178.68) = $9233. This value is then rounded down to the nearest $25 to yield 2015’s 10 percent tax bracket
of $9,225.
Table 7. Tax Parameters, Base Years, and Base Values
