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)
