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

September 21, 2006

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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