September 16, 2009 Inflation Adjustment of Tax Brackets Almost Zero for Next Year Gerald Prante Mark Robyn Gerald Prante, Mark Robyn Print this page Subscribe Support our work Download Fiscal Fact No. 188 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. Topics Center for Federal Tax Policy Individual Income and Payroll Taxes Research
