Inflation Adjustments for 2007 Tax Year Will be Largest in 15 Years
Last Friday, the Bureau of Labor Statistics (BLS) released its August estimate for the Consumer Price Index, meaning we can now estimate what the tax brackets for Tax Year 2007 will look like. The IRS will not release the official numbers until early December.
The tax code has many adjustments for annual increases in the price level, or what are commonly called “adjustments for inflation.” These annual adjustments are based on inflation from the previous year minus four months. For example, the adjustments made from Tax Year 2006 to Tax Year 2007 are based upon the change in the CPI-U statistic from September 2005 through August 2006. So in the spring of 2008, when you are filling out your tax return, those numbers for brackets, standard deductions, phase-out ranges, etc. will actually be a function of how prices changed in the fall of 2005.
This may seem like a significant lag, but the logic behind it is that tax professionals and accountants need to have in advance the brackets, exemption amounts, etc. prior to payroll for that year. Also, unlike other countries or previous time periods, inflation in the U.S. today is relatively low and stable.
However, while inflation is still low relative to the 1970s, the time period of September 2005 – August 2006 was relatively high as a result of the run-up in energy costs. The CPI-U increased by an average of 3.9037 percent in that time period, which is the highest change since 1990.
What does all this mean for your 2007 tax bill? It means that the bracket and other statutory adjustments will be fairly significant. Specifically, here are Tax Foundation estimates for the various brackets and tax items for Tax Year 2007 compared with Tax Years 2005 and 2006.
Popular Tax Items
|
Tax Item |
2005 Value |
2006 Value |
2007 Projected Value |
|
Personal Exemption |
$3,200 |
$3,300 |
$3,400 |
|
Standard Deduction Single Filer |
$5,000 |
$5,150 |
$5,350 |
|
Standard Deduction Married filing Jointly |
$10,000 |
$10,300 |
$10,700 |
|
Standard Deduction Head of Household |
$7,300 |
$7,550 |
$7,850 |
|
Standard Deduction Married Filing Separate |
$5,000 |
$5,150 |
$5,350 |
|
PEP (Personal Exemption Phase-out) Begins at AGI Single |
$145,950 |
$150,500 |
$156,400 |
|
PEP (Personal Exemption Phase-out) Begins at AGI Married filing Jointly |
$218,950 |
$225,750 |
$234,600 |
|
PEP (Personal Exemption Phase-out) Begins at AGI Head of Household |
$182,450 |
$188,150 |
$195,500 |
|
PEP (Personal Exemption Phase-out) Begins at AGI Married filing Separately |
$109,475 |
$112,875 |
$117,300 |
|
Pease (Itemized Deduction Phase-out) Begins at AGI Single/MFJ/HH |
$145,950 |
$150,500 |
$156,400 |
|
Pease (Itemized Deduction Phase-out) Begins at AGI Married filing Separately |
$72,975 |
$75,250 |
$78,200 |
Tax Bracket Tables
Single Filers
|
2005 Taxable Income Bracket ($) |
2006 Taxable Income Bracket ($) |
2007 Taxable Income Bracket ($) |
|
|
10% Bracket |
0 – 7,300 |
0 – 7,550 |
0 – 7,825 |
|
15% Bracket |
7,301 – 29,700 |
7,551 – 30,650 |
7,826 – 31,850 |
|
25% Bracket |
29,701 – 71,950 |
30,651 – 74,200 |
31,851 – 77,100 |
|
28% Bracket |
71,951 – 150,150 |
74,201 – 154,800 |
77,101 – 160,850 |
|
33% Bracket |
150,151 – 326,450 |
154,801 – 336,500 |
160,851 – 349,700 |
|
35% Bracket |
326,451 – higher |
336,551 – higher |
349,701 – higher |
Married Filing Jointly
|
2005 Taxable Income Bracket ($) |
2006 Taxable Income Bracket ($) |
2007 Taxable Income Bracket ($) |
|
|
10% Bracket |
0 – 14,600 |
0 – 15,100 |
0 – 15,650 |
|
15% Bracket |
14,601 – 59,400 |
15,101 – 61,300 |
15,651 – 63,700 |
|
25% Bracket |
59,401 – 119,950 |
61,301 – 123,700 |
63,701 – 128,500 |
|
28% Bracket |
119,951 – 182,800 |
123,701 – 188,450 |
128,501 – 195,850 |
|
33% Bracket |
182,801 – 326,450 |
188,451 – 336,550 |
195,851 – 349,700 |
|
35% Bracket |
326,451 – higher |
336,551 – higher |
349,701 – higher |
Married Filing Separately
|
2005 Taxable Income Bracket ($) |
2006 Taxable Income Bracket ($) |
2007 Taxable Income Bracket ($) |
|
|
10% Bracket |
0 – 7,300 |
0 – 7,550 |
0 – 7,825 |
|
15% Bracket |
7,301 – 29,700 |
7,551 – 30,650 |
7,826 – 31,850 |
|
25% Bracket |
29,701 – 59,975 |
30,651 – 61,850 |
31,851 – 64,250 |
|
28% Bracket |
59,976 – 91,400 |
61,851 – 94,225 |
64,251 – 97,925 |
|
33% Bracket |
91,401 – 163,225 |
94,226 – 168,275 |
97,926 – 174,850 |
|
35% Bracket |
163,226 – higher |
168,276 – higher |
174,851 – higher |
Head of Household
|
2005 Taxable Income Bracket ($) |
2006 Taxable Income Bracket ($) |
2007 Taxable Income Bracket ($) |
|
|
10% Bracket |
0 – 10,450 |
0 – 10,750 |
0 – 11,200 |
|
15% Bracket |
10,451 – 39,800 |
10,751 – 41,050 |
11,201 – 42,650 |
|
25% Bracket |
39,801 – 102,800 |
41,051 – 106,000 |
42,651 – 110,100 |
|
28% Bracket |
102,801 – 166,450 |
106,001 – 171,650 |
110,101 – 178,350 |
|
33% Bracket |
166,451 – 326,450 |
171,651 – 336,550 |
178,351 – 349,700 |
|
35% Bracket |
326,451 – higher |
336,551 – higher |
349,701 – higher |
For a more detailed explanation on how this inflation adjustment is done, check out this article from an issue of Tax Notes last year as Accounting Professor James C. Young shows how it was done for Tax Year 2006. (Courtesy Tax Prof Blog)