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October 2, 2014

2015 Tax Brackets

Kyle Pomerleau

Kyle Pomerleau

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Introduction

Every year, the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent what is called “bracket creep.” 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 Brackets 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 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 Deduction 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 deductions once
a taxpayer’s adjusted gross income 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 Credit

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
Base Year Parameter Base Value (Single; HoH; Married) Rounding Convention
Source: Author’s calculations.
1987 Standard Deduction $3,000; $4,400; $6,000 Down to nearest $50
1988 Personal Exemption $2,000 Down to nearest $50
1992 15% Bracket $22,100; $29,600; $44,200 Down to nearest $50
  25% Bracket $53,500; $76,400; $89,150 Down to nearest $50
1993 28% Bracket $115,000; $127,500; $140,000 Down to nearest $50
  33% Bracket $250,000; $250,000; $250,000 Down to nearest $50
1995 EITC See Table 8, below Nearest $1
2002 10% Bracket $7,000; $10,000; $14,000 Down to nearest $25
2008 EITC Marriage Penalty Fix $5,000 Nearest $10
2011 AMT $50,600, N/A, $78,750 Nearest $100
2012 35% Bracket $400,000; $425,000; $450,000 Down to nearest $50
  PEP $250,000; $275,000; $300,000 Down to nearest $50
  Pease $250,000; $275,000; $300,000 Down to nearest $50
Table 8. EITC Base Parameters
  No Children One Child Two Children Three or More Children
Credit Rate 7.65% 34% 40% 40%
Phaseout Rate 7.65% 15.98% 21.06% 21.06%
Income, Max Credit $4,220 $6,330 $8,890 $8,890
Income, Phaseout $5,280 $11,610 $11,610 $11,610
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About the Author

Kyle Pomerleau

Resident Fellow, American Enterprise Institute

Kyle Pomerleau is a resident fellow at the American Enterprise Institute (AEI), where he studies federal tax policy. Before joining AEI, Mr. Pomerleau was chief economist and vice president of economic analysis at the Tax Foundation, where he led the macroeconomic and tax modeling team and wrote on various tax policy topics, including corporate taxation, international tax policy, carbon taxation, and tax reform. Read more.

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A 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.

Inflation 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.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual 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.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

The 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 as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

Itemized 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. 

Bracket 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.

A 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.

Taxable 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.

The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system.