2016 Tax Brackets

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 bracketsA 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. or have reduced value from credits or deductions due to inflation, instead of any 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 Methodology, below.

Estimated Income Tax Brackets and Rates

In 2016, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (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 $415,050 and higher for single filers
and $466,950 and higher for married filers.

Table 1. 2016 Taxable Income Tax Brackets and Rates (Estimate)

Rate	Single Filers	Married Joint Filers	Head of Household Filers
Source: Author’s Calculations.
10%	$0 to $9,275	$0 to $18,550	$0 to $13,250
15%	$9,275 to $37,650	$18,550 to $75,300	$13,250 to $50,400
25%	$37,650 to $91,150	$75,300 to $151,900	$50,400 to $130,150
28%	$91,150 to $190,150	$151,900 to $231,450	$130,150 to $210,800
33%	$190,150 to $413,350	$231,450 to $413,350	$210,800 to $413,350
35%	$413,350 to $415,050	$413,350 to $466,950	$413,350 to $441,000
39.6%	$415,050+	$466,950+	$441,000+

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 for single and married couples filing jointly will not increase in 2016 (Table 2). For taxpayers filing as head of household, it will increase by $50 from $9,250 to $9,300. The personal exemption for 2016 will be $4,050.

Table 2. 2016 Standard Deduction and Personal Exemption (Estimate)

Filing Status	Deduction Amount
Source: Author’s Calculations.
Single	$6,300.00
Married Filing Jointly	$12,600.00
Head of Household	$9,300.00
Personal Exemption	$4,050.00

PEP and Pease

PEP and Pease are two provisions in the tax code that increase taxable income for high-income earners. PEP is the phase-out 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 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 amount. The income threshold for both PEP and Pease will be $259,400 for single filers and $311,300 for married filers (Tables 3 and 4). PEP will end at $381,900 for singles and $433,800 for married couples filing jointly, meaning these taxpayers will no longer have a personal exemption.

Table 3. 2016 Pease Limitations on Itemized Deductions (Estimate)

Filing Status	Income
Source: Author’s Calculations.
Single	$259,400.00
Married Filing Jointly	$311,300.00
Head of Household	$285,350.00

Table 4. 2016 Personal Exemption Phase-Out (Estimate)

Filing Status	Phase-Out Begin	Phase-Out Complete
Source: Author’s Calculations.
Single	$259,400.00	$381,900.00
Married Filing Jointly	$311,300.00	$433,800.00
Head of Household	$285,350.00	$407,850.00

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 2016 is $53,900 for singles and $83,800 for married couples filing jointly (Table 5).

Table 5. 2016 Alternative Minimum Tax Exemptions (Estimate)

Filing Status	Exemption Amount
Source: Author’s Calculations.
Single	$ 53,900.00
Married Filing Jointly	$ 83,800.00
Married Filing Separately	$ 41,900.00

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.

2016’s maximum Earned Income Tax Credit for singles, heads of households, and joint filers is $506, if the filer has no children (Table 6). The credit is $3,373 for one child, $5,572 for two children, and $6,268 for three or more children.

Table 6. 2016 Earned Income Tax Credit Parameters (Estimate)

Filing Status		No Children	One Child	Two Children	Three or More Children
Source: Author’s Calculations.
Single or Head of Household	Income at Max Credit	$6,610	$9,920	$13,930	$13,930
	Maximum Credit	$506	$3,373	$5,572	$6,268
	Phase out Begins	$8,270	$18,190	$18,190	$18,190
	Phase out Ends (Credit Equals Zero)	$14,880	$39,296	$44,648	$47,955
Married Filing Jointly	Income at Max Credit	$6,610	$9,920	$13,930	$13,930
	Maximum Credit	$506	$3,373	$5,572	$6,268
	Phase out Begins	$13,810	$23,730	$23,730	$23,730
	Phase out Ends (Credit Equals Zero)	$20,420	$44,836	$50,188	$53,495

Methodology

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, see Table 7). 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 2016 (236.749) and then divided by the average CPI for fiscal year 2002 (178.675): $7,000 x (236.749/178.674) = $9,275.18. This value is then rounded down to the nearest $25 to yield 2016’s 10 percent tax bracket of $9,275.

Table 7. Tax Parameters, Base Years, and Base Values

Base Year	Parameter	Base Value (Single; HoH; Married)	Rounding Convention
Source: Author’s Calculations.
Note: Bracket values are the tops of each bracket.
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 $10, for thresholds. Nearest $1, for credit amount.
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
Source: Author’s Calculations.
Credit Rate	7.65%	34%	40%	40%
Phase-Out Rate	7.65%	15.98%	21.06%	21.06%
Income, Max Credit	$4,220	$6,330	$8,890	$8,890
Income, Phase-Out	$5,280	$11,610	$11,610	$11,610

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