Taxpayers Will See Relief By Way of Inflation-Adjusted Indexing for 2012, CCH Says

\RIVERWOODS, Ill., Sept. 15, 2011 /CHICAGOPRESSRELEASE.COM/ — Taxpayers still struggling with the economic downturn will get at least some relief in 2012, thanks to the mandatory annual inflation-adjustments called for under the U.S. Tax Code according to CCH, a Wolters Kluwer business and the leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).

Today, CCH released estimated ranges for each 2012 tax bracket as well as projections for a growing number of inflation-sensitive tax figures, such as the personal exemption and the standard deduction.

“Indexing for inflation has become an established part of our tax system, and it’s likely to be a part of the tax law for the foreseeable future – even as Congress debates changes to the tax rates themselves,” said George Jones, JD, CCH Senior Federal Tax Analyst.  “Most taxpayers benefit from inflation adjustments since they tend to preserve the value of most, but not all, of the dollar-based benefits under the Tax Code year after year.”

The uncertainty facing projections at this time last year does not apply this year, thanks to last December’s 2010 Tax Relief Act that extended the then-expiring Bush era tax cuts temporarily through 2012. For 2011 and again in 2012, the basic income tax rate structure and framework upon which inflation-sensitive tax benefits are computed remain in place.

When there is inflation, indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets – in the existing 15-percent bracket, for example, rather than the existing 25-percent bracket. The formula used in indexing showed a relatively higher amount of inflation this year over last, just over 3.8 percent. This increase is well above the 1.4 percent amount used last year, and far greater in comparison to the 0.18 percent inflation factor used to set 2010 tax amounts. Although so-called “rounding conventions” keep some tax amounts for 2012 the same as they are for 2011, such as the $13,000 gift tax annual exclusion, most 2012 figures will move higher.

The examples, below, show the modest savings generated by indexing of the 2012 individual income tax rate brackets for taxpayers in three typical situations.

Add to those savings the additional tax savings realized by slightly higher standard deduction and personal exemption amounts for 2012 in most cases, as well amounts that might be claimed from an increase in the income ceilings imposed on tax benefits such as education credits, individual retirement account (IRA) contributions and more. Combined, inflation-based tax savings for 2012 can become substantial.

  • Because of inflation adjustments, a married couple filing jointly with a total taxable income of $100,000 should pay $190 less income taxes in 2012 than they will on the same income for 2011 because of indexing of their tax bracket for 2012.
  • A single filer with taxable income of $50,000 should owe $95 less next year due to the adjustments to the income tax rate brackets between 2011 and 2012.
  • For taxpayers with taxable income over the start of the top 35-percent bracket, the maximum dollar savings from indexing the tax brackets for 2012 will be more dramatic. Not only is the top 35-percent rate bracket projected to rise from $379,150 to $388,350, but as is the case for all individual taxpayers, the rise in the bracket amounts below the individual’s top marginal rate (that is, the incremental value of the 10-, 15-, 25-, 28-, and 33-percent brackets for someone in the 35-percent marginal rate bracket) also benefits the individual taxpayer.  As a result of the inflation adjustment in each of the brackets – someone filing a joint return with taxable income of $450,000 in 2012, for example, will pay $732 less in income taxes in 2012 than in 2011.

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. In fact, the health care reform legislation passed in 2010 adds an even greater number of inflation-adjustments to the Tax Code, although health-related indexing won’t start until 2013.

Notable as one of the new-for-2012 inflation-adjusted tax figures is the estate tax exemption. Set at a $5 million level for 2011 and 2012 under a temporary compromise struck at the end of 2010 between keeping and repealing the estate tax, the $5 million amount as applied in 2012 is required to be adjusted for inflation.  For 2012, up to $5,120,000 of an estate will be exempt from the current 35-percent estate tax.

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, amounts such as the 2012 vehicle depreciation limits won’t be available until later in 2011, while the standard business mileage rate (that is currently set at 55.5 cents for the second half of 2011 due to a special mid-year adjustment) isn’t expected to be computed for 2012 and released until December 2011.

CCH’s projections for other indexed amounts are based on the relevant inflation data released September 15, 2011, 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 Congress must regularly either increase the amounts by statute or expose additional households to the AMT,” Jones said.

Congress has relied on one- or two-year AMT patches to account for inflation from the initially set amounts of $33,750 and $45,000, respectively. However, there is no technical requirement under the Tax Code to increase those amounts for inflation.  For 2011, the AMT exemption amounts as provided most recently by Congress under the 2010 Tax Relief Act are $48,450 for single individuals and $74,450 for married couples filing jointly. No amounts have been set yet for 2012. While they are scheduled to revert to the default amounts of $33,750 / $45,000 without action, the expectation is that, once again, Congress will raise the AMT exemption amount until it finds a permanent solution.

Standard Deduction, Personal Exemption Rise

The standard deduction and personal exemption amounts are also subject to indexing. After very little movement in the 2010 amounts, 2011 saw a jump in all standard deduction levels. Projections for 2012 indicate that the trend will continue, with increases across the board. The standard deduction for single taxpayers, heads of households and married couples filing jointly will all show increases for 2012, by $150, $200 and $300, respectively.

The standard deduction for joint filers, for example, would rise from $11,600 to $11,900. Any increase in the standard deduction, of course, can produce lower taxes by decreasing the taxpayer’s taxable income.

The additional standard deduction for those age 65 or older or who are blind will stay at its present $1,150 level in 2012 for married individuals and surviving spouses and at $1,450 for single filers, because of “rounding down.” The personal exemption amount, however, gets bumped up by inflation by $100, to $3,800 in 2012 after having increased only $50 between 2010 and 2011.

Taxpayers for many years have had to lose a good portion of the value of personal exemptions and itemized deductions when their incomes rise above certain levels, which have also been adjusted for inflation. Starting in 2010, these “phase-outs” disappeared from the Tax Code, but are only scheduled to do so temporarily and return in full force in 2013 if Congress does not act. If they had been effective for 2012, the inflation-adjusted personal exemption phase-out range would have started at $260,500 for joint filers and $173,650 for single filers and a phase-out range for itemized deductions would have started at $173,650 for all filers except married couples filing separately, who would have been subject to a $86,825 cutoff.

“The removal of limitations on itemized deductions and personal exemptions, rather than indexing of brackets, will provide major tax savings in 2012 for many well-off taxpayers,” Jones added. “The return of these limitations in 2013 would pose an equally important change in the reverse direction.”

For a complete look at how income ranges for each tax bracket are projected to shift next, see the CCH chart below.

“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 only five times in the years 2001 through 2011. It last rose for the 2009 tax year. For 2012 the deduction will remain at that $950 level.

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 in 2009, when it rose to $13,000. It remains there for 2012.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is the leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CorpSystem®, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us now on Twitter @CCHMediaHelp.

Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.


Married Filing Jointly (& Surviving Spouse)

Tax Rate 2012 Taxable Income 2011 Taxable Income
10% $0-$17,400 $0-$17,000
15% $17,400-$70,700 $17,000-$69,000
25% $70,700-$142,700 $69,000-$139,350
28% $142,700-$217,450 $139,350-$212,300
33% $217,450-$388,350 $212,300-$379,150
35% $388,350+ $379,150+

Unmarried Individuals (other than surviving spouses and heads of households)

Tax Rate 2012 Taxable Income 2011 Taxable Income
10% $0-$8,700 $0-$8,500
15% $8,700-$35,350 $8,500-$34,500
25% $35,350-$85,650 $34,500-$83,600
28% $85,650-$178,650 $83,600-$174,400
33% $178,650-$388,350 $174,400-$379,150
35% $388,350+ $379,150+

Head of Household

Tax Rate 2012 Taxable Income 2011 Taxable Income
10% $0-$12,400 $0-$12,150
15% $12,400-$47,350 $12,150-$46,250
25% $47,350-$122,300 $46,250-$119,400
28% $122,300-$198,050 $119,400-$193,350
33% $198,050-$388,350 $193,350-$379,150
35% $388,350+ $379,150+

Married Individuals Filing Separate Returns

Tax Rate 2012 Taxable Income 2011 Taxable Income
10% $0-$8,700 $0-$8,500
15% $8,700-$35,350 $8,500-$34,500
25% $35,350-$71,350 $34,500-$69,675
28% $71,350-$108,725 $69,675-$106,150
33% $108,725-$194,175 $106,150-$189,575
35% $194,175+ $189,575+

Standard Deduction Amounts

Filing Status 2012 2011 Increase
Married Filing Jointly
(& Surviving Spouse)
$11,900 $11,600 $300
Married Filing
$5,950 $5,800 $150
Single $5,950 $5,800 $150
Head of Household $8,700 $8,500 $200

Standard Deduction for Dependents (“Kiddie” Standard Deduction)

2012 2011 Increase
$950 $950 $0

Personal Exemption Amounts

2012 2011 Increase
$3,800 $3,700 $100

Gift Tax Exemption

2012 2011 Increase
$13,000 $13,000 $ 0

* These numbers are projected for the 2012 tax year and have not been confirmed by the Internal Revenue Service.

SOURCE CCH, a Wolters Kluwer business


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