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Inflation Adjustment of Tax Brackets Almost Zero for Next Year

4 min readBy: Gerald Prante, Mark Robyn

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 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. 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 withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. in 2010.

The numbers released today indicate that this year will mark the smallest 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. 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 taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. 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 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 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 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 recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. . 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 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. bracket threshold, personal exemption, standard deduction, and phase-in and phase-out ranges for the limitations on personal exemptions and 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. 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.

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