RIVERWOODS, Ill.,
Sept. 17 /PRNewswire/ -- Taxpayers will benefit next year
from the indexing of many features of the tax code, according to CCH, a
Wolters Kluwer business and a leading provider of tax, accounting and
audit information, software and services, which today released estimated
income ranges for each 2009 tax bracket (CCHGroup.com).
Indexing for
inflation has become a settled part of our tax system, according to
George Jones, JD, CCH senior federal tax analyst.
"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.
2009 Indexing of income tax 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.
"This means that across-the-board inflation adjustments to the income
tax brackets provide extra helpings of relief for those in the upper
brackets, since they share in the reduction within each bracket, not
just their own marginal tax bracket," Jones said.
Two examples show the modest tax savings generated by indexing:
-- Because of inflation adjustments, a married couple filing jointly
with total taxable income of
$100,000 will pay
$312.50 less in income taxes in 2009 than they will on
the same income for 2008.
-- A single filer with taxable income of
$50,000 will save
$156.25 next year due to the adjustments.
Inflation Adjustments
Since the late 1980s, the U.S. tax code has required that federal
income tax brackets be adjusted for inflation annually, and inflation
adjustments have been inserted into the Internal Revenue 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 inflation-adjusted figures are computed earlier and some
later. For example, in May the IRS released the Health Savings Account
premium deduction limits for calendar year 2009: they are
$5,800 for individuals with self-only coverage and
$11,600 for individuals with family coverage.
Amounts such as the 2009 vehicle depreciation limits, however, won't
be available until 2009 (the
$2,960 first-year amount for 2008 was not released until
March 2008), while the standard business mileage rate
(that is currently set at
58.5 cents for the rest of 2008) isn't expected to be
computed for 2009 and released until late
November 2008.
One new adjustment for 2009 potentially affects millions of
taxpayers, the so-called Code Sec. 219(b)(5) deductible amount allowed
for contributions to retirement savings accounts (typically, IRAs). But
while the deduction, that was
$5,000 for 2008, is now subject to an inflation
adjustment, the final amount must be rounded to the lowest multiple of
$500, leaving the
$5,000 limit as is for 2009.
CCH's projections for other indexed amounts are based on the relevant
inflation data released
September 16, 2008, 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.
Some Items Not Indexed
Jones observed that some items in the Code are not indexed for
inflation and stay the same, while others rise by dollar amounts already
written into the tax law.
"The exemption amounts for the alternative minimum tax are not
indexed, which means that each year Congress must either increase the
amounts by statute or expose additional households to the AMT," Jones
said.
In 2007, Congress set the AMT exemption amounts at
$44,350 for single individuals and
$66,250 for married couples filing jointly. These amounts
lapsed and are now set for 2008 under prior law at just
$33,750 for individuals and
$45,000 for married couples filing jointly. Congress,
however, is expected to enact another round of temporary relief.
Standard Deduction, Personal Exemption Also Rise
The standard deduction and personal exemption amounts are also
subject to indexing and these are projected to increase for 2009. These
increases can produce lower taxes by lowering the taxpayer's taxable
income.
Single taxpayers and married taxpayers filing separately could see a
$250 increase over 2008 in their standard deduction, to
$5,700, while the standard deduction for joint filers
will increase by
$500 to $11,400. Heads of households will see an increase
in their standard deduction of
$350, to
$8,350.
The additional standard deduction for those age 65 or older or who
are blind, will rise
$50 to $1,100 in 2009 for married individuals and
surviving spouses, and
$50 to $1,400 for single filers. The personal exemption
amount will go up in 2009 by
$150 to $3,650.
These inflation adjustments can add up over time. For example, since
the 1989 tax year, the standard deduction for joint filers has more than
doubled, from
$5,000 to the anticipated
$11,400 amount for 2009.
Taxpayers can, however, lose a good portion of the value of personal
exemptions and itemized deductions when their incomes rise above certain
levels.
Those "phaseout" levels are also adjusted for inflation. For 2009,
married couples filing jointly will begin to lose some of the value of
any itemized deductions when their adjusted gross income exceeds
$166,800. Likewise, they will begin to lose some of the
value of their personal exemptions when their adjusted gross income
exceeds
$250,200. However, relief from this "stealth tax" has
been growing in recent years.
For 2009, the reduction in personal exemptions and itemized
deductions is scheduled to be only one-third of what it was in 2005.
That's because both "phaseouts," first started under the Revenue
Reconciliation Act of 1990, are themselves being phased out -- by
one-third in 2006 and 2007, two-thirds in 2008 and 2009 and completely
repealed for 2010. For a complete look at how income ranges for each tax
bracket are projected to shift next, see the attached CCH chart.
"Kiddie" Deduction, Gift Tax Exemption
In general, inflation adjustments are rounded to the next-lower
multiple of
$50, so if the adjustment produces an increase of less
than
$50, no increase is made. The "kiddie" deduction, used on
the returns of children claimed as dependents on their parents' returns,
increased in 2001 from
$700 to $750, and jumped to
$800 for 2004.
For 2006, it increased to
$850 and stayed there for 2007. For 2008, it increased
again to
$900, and applies to more "kiddies," with the unearned
income of child dependents up through 18 years old (23 years old if
full-time students) being taxed at their parents' rates. For 2009, the
kiddie standard deduction for this expanded group will rise to
$950.
The Code only allows the gift tax exemption to rise when the
inflation adjustment would produce an increase of
$1,000 or more. The last increase occurred at the
beginning of 2006, when the exemption increased to its current
$12,000. This year's inflation figures, however, push it
over the next threshold, so for 2009 it will rise to
$13,000 ($26,000 for couples who elect to
"split" their gifts).
About CCH, a Wolters Kluwer business