Tuesday, January 15, 2008

The New tax brackets aren’t keeping with inflation

Income-tax rates are unchanged for 2007, but, as happens every year, the Internal Revenue Service has adjusted tax brackets to account for inflation. Or have they?

The IRS is required by law to adjust the dollar amounts for a variety of tax provisions each year to keep pace with inflation. The adjustments of tax brackets, standard deductions, personal exemptions, earned-income credits and other things affect about three dozen areas of tax rules.

Let’s take a look at the new brackets. In the table, I have listed the tax rate, break point and calculated the percentage change from last year. Several things really jumped out at me from this chart.

#1 The tax brackets increase by different amounts for each tax bracket. The lowest bracket for those reporting income of less than $7825 has been adjusted for inflation by 2.56%. While the highest tax bracket received an increase of only 2.28%.

#2 The tax brackets increase by different amounts for single and married filers. It’s not a big difference, but it is there.

#3 Most of the brackets have been increased by less than the estimated CPI, which is 2.4% for 2007. Note, the official CPI data is to be released on January 16.

#4 And finally, did you notice that the gap between single and married taxpayers shrinks significantly with increasing salary? And eventually disappears in the 33% tax bracket. It’s like that second person just completely disappears after a couple earns more than $357,700 a year.

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