CCH projects 2009 tax indexing amounts

Taxpayers will benefit next year from the indexing of many features of the tax code, according to CCH, a Wolters Kluwer business and provider of tax, accounting, and audit information, software, and services, which has released estimated income ranges for each 2009 tax bracket.

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.

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.

"This means that across-the-board inflation adjustments to the 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).

CCH 2009 TAX PROJECTIONS
Married Filing Jointly (& Surviving Spouse)


2009 Taxable Income Tax Rate 2008 Taxable Income Tax Rate
$0-$16,700 10% $0-$16,050 10%
$16,700-$67,900 15% $16,050-$65,100 15%
$67,900-$137,050 25% $65,100-$131,450 25%
$137,050-$208,850 28% $131,450-$200,300 28%
$208,850-$372,950 33% $200,300-$357,700 33%
$372,950 + 35% $357,700 + 35%

Married Filing Separately


2009 Taxable Income Tax Rate 2008 Taxable Income Tax Rate
$0-$8,350 10% $0-$8,025 10%
$8,350-$33,950 15% $8,025-$32,550 15%
$33,950-$68,525 25% $32,550-$65,725 25%
$68,525-$104,425 28% $65,725-$100,150 28%
$104,425-$186,475 33% $100,150-$178,850 33%
$186,475 + 35% $178,850 + 35%

Single Filers


2009 Taxable Income Tax Rate 2008 Taxable Income Tax Rate
$0-$8,350 10% $0-$8,025 10%
$8,350-$33,950 15% $8,025-$32,550 15%
$33,950-$82,250 25% $32,550-$78,850 25%
$82,250-$171,550 28% $78,850-$164,550 28%
$171,550-$372,950 33% $164,550-$357,700 33%
$372,950 + 35% $357,700 + 35%

Head of Household


2009 Taxable Income Tax Rate 2008 Taxable Income Tax Rate
$0-$11,950 10% $0-$11,450 10%
$11,950-$45,500 15% $11,450-$43,650 15%
$45,500-$117,450 25% $43,650-$112,650 25%
$117,450-$190,200 28% $112,650-$182,400 28%
$190,200-$372,950 33% $182,400-$357,700 33%
$372,950 + 35% $357,700 + 35%

Standard Deduction Amounts


Filing Status 2009 2008 Increase
Married Filing Jointly (& Surviving Spouse) $11,400 $10,900 $500
Married Filing Separately $5,700 $5,450 $250
Single $5,700 $5,450 $250
Head of Household $8,350 $8,000 $350

Standard Deduction for Dependents ("Kiddie" Standard Deduction)


2009 2008 Increase
$950 $900 $50

Income Level at Which 3-Percent Itemized Deduction Limitation Takes Effect (Adjusted Gross Income)


Filing Status 2009 2008 Increase
Married Filing Jointly (& Surviving Spouse) $166,800 $159,950 $6,850
Married Filing Separately $83,400 $79,975 $3,425
Single $166,800 $159,950 $6,850
Head of Household $166,800 $159,950 $6,850

Personal Exemption Amounts


2009 2008 Increase
$3,650 $3,500 $150

Threshold for Personal Exemption Phaseout


Filing Status 2009 2008 Increase
Married Filing Jointly (& Surviving Spouse) $250,200 $239,950 $10,250
Married Filing Separately $125,100 $119,975 $5,125
Single $166,800 $159,950 $6,850
Head of Household $208,500 $199,950 $8,550

Gift Tax Exemption


2009 2008 Increase
$13,000 $12,000 $ 1,000

Income Limit for Full Roth IRA Contribution


Filing Status 2009 2008 Increase
Married Filing Jointly $166,000 $159,000 $7,000
Single $105,000 $101,000 $4,000

Note: These numbers are projected for the 2009 tax year and have not been confirmed by the Internal Revenue Service.

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