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 tax parameters for 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. 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 withholding in 2010.
The numbers released today indicate that this year will mark the smallest inflation adjustment on record (since the IRS began adjusting tax parameters for 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. 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 brackets 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 recession. 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 deductions. 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) |
N/A* (167,100) |
166,800 |
|
Phaseout of Itemized Deductions Begins (AGI) |
N/A* (83,550) |
83,400 |
|
Phaseout of Personal Exemptions Begins (AGI) |
N/A* (167,100) |
166,800 |
|
Phaseout of Personal Exemptions Begins (AGI) |
N/A* (250,650) |
250,200 |
|
Phaseout of Personal Exemptions Begins (AGI) |
N/A* (208,850) |
208,500 |
|
Phaseout of Personal Exemptions Begins (AGI) |
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. |