Taxpayers will reap little benefit next year from the indexing of many features of the Tax Code, according to CCH, which released estimated income ranges for each 2010 tax bracket.
CCH projects the personal exemption to show no increase and the standard deduction to remain constant for all but those filing as heads of households.
Indexing for inflation has become a settled part of the tax system, according to CCH senior federal tax analyst (and Accounting Today columnist) George Jones. "While some tax cuts in recent years are only temporary, and are scheduled to be followed by increases down the line, indexing works year after year, and it's likely to be a part of the tax law for the foreseeable future, regardless of whether Congress plans to tinker more with the tax rates themselves," Jones noted.
When there is inflation, indexing of brackets lowers tax bills by including more of people's incomes in lower brackets - in the 15 percent rather than the 25 percent bracket, for example.
The formula used in indexing showed a small amount of inflation this year, but it would have taken only a slight change to turn the result negative.
"I think it's safe to say that no one in Congress or the IRS ever seriously contemplated a deflationary adjustment, which would have the effect of raising taxes in a down economy," Jones said. "In a sense, we just dodged a bullet that would have posed a difficult question to the tax authorities."
The examples below show the modest tax savings generated by indexing:
* Because of inflation adjustments, a married couple filing jointly with total taxable income of $100,000 should pay $12.50 less in income taxes in 2010 than they will on the same income for 2009 (compared to a $312.50 savings between 2008 and 2009).
* A single filer with taxable income of $50,000 should owe $6.25 less next year due to the adjustments (again, compared to a $156.25 savings with significantly higher inflation between 2008 and 2009).
* For taxpayers with more than $373,650 in taxable income in both 2009 and 2010, the maximum savings from indexing the tax brackets for 2010 will be $51 for joint filers and $39.75 for single filers (as compared to a $1,213 and $913.25 difference, respectively, between 2008 and 2009).
INFLATION ADJUSTMENTS
Since the late 1980s, the Tax Code has required that federal income tax brackets be adjusted for inflation annually, and adjustments have been inserted into the Tax Code in recent years with increasing frequency.
For example, the code now requires over 50 other inflation-driven computations to determine deduction, exemption and exclusion amounts, in addition to the 40 separate computations needed to inflation-adjust the tax bracket tables each year.
Most adjustments are based on Consumer Price Index figures for September through August immediately prior to the adjusted year. However, some figures are computed earlier and some later. For example, in May the IRS released the health savings account premium deduction limits for calendar year 2010: They are $3,050 for individuals with self-only coverage (up from $3,000 in 2009) and $6,150 for individuals with family coverage (up from $5,950 in 2009).
Amounts such as the 2010 vehicle depreciation limits, however, won't be available until 2010 (the $2,960 regular first-year amount for 2009 was not released until March 2009), while the standard business mileage rate (that is currently set at 55 cents for the rest of 2009) isn't expected to be computed for 2010 and released until late November 2009.
In 2009, the so-called Code Sec. 219(b)(5) deductible amount allowed for contributions to retirement savings accounts (typically, IRAs) was first made subject to an adjustment for inflation. But because the final amount must be rounded to the lowest multiple of $500, the limit for 2009 remained at $5,000. Once again, rounding will push a $5,224 initial amount back down to $5,000 for 2010.
CCH's projections for other indexed amounts are based on the relevant inflation data released Sept. 16, 2009, by the U.S. Department of Labor.
The IRS usually releases official numbers by December each year. CCH tax bracket projections are provided for illustrative purposes only, and should not be used for income tax returns or other federal income tax-related purposes until confirmed by the IRS later this year. To review the CCH Tax Projections online, go to www.cch.com/press/news/2009/20090917t.asp.
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