2010 will mark the first time that the federal personal exemption and 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 as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. (for most 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. payers) have not increased since the IRS started 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. adjusting these parameters in the mid 1980s. Each year the IRS adjusts a host of tax parameters to account for inflation. Things like the standard deduction, the personal exemption, and the tax bracketA 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. s (the income levels where each tax rate kicks in) are increased to keep up with the Bureau of Labor Statistic’s (BLS) Consumer Price Index (CPI) measure. These adjustments help taxpayers avoid increases in tax liability that are simply due to inflation.
Today the Bureau of Labor Statistics released its August 2009 inflation data. Each tax year’s adjustments are based on the average CPI for the 12-month period ending August 31 of the previous year, meaning that the CPI data that was released today will be used to determine the tax year 2010 tax parameters. Specifically, the IRS uses the All Items CPI for All Urban Consumers (CPI-U). This index has actually fallen from where it was a year ago, indicating deflation rather than inflation. However the 12-month average is still slightly higher than last year’s. But the relatively low CPI numbers mean that for 2010 the tax parameters will see very small adjustments, and in some cases no adjustments at all (the IRS uses a rounding method that results in some parameters receiving no adjustment).
I should note that using the term “inflation” here is not entirely accurate. CPI does not measure total inflation, rather it measures “changes in the prices paid by urban consumers for a representative basket of goods and services.” But the general idea is to adjust for actual inflation. You can read about CPI here and inflation here.
Today we released a new Fiscal Fact outlining the major inflation adjustments for tax year 2010. From the Fiscal Fact, titled Inflation Adjustment of Tax Brackets Almost Zero for Next Year:
The numbers released today indicate that this year will mark the smallest inflation adjustment on record… 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…Share