Inflation Adjustments for 2007 Tax Year Will be Largest in 15 Years

September 21, 2006

Gerald Prante

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)

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