Unedited news and product information from vendors.
Taxpayers Will See Relief By Way of Inflation-adjusted Indexing, Total Tax Impact Still Remains Unclear, CCH Says
Sep 14, 2012 (06:09 PM EDT)
Final Decision on Tax Brackets and Other Sunsetting Tax Provisions Will Determine Ultimate 2013 Tax Obligations
RIVERWOODS, Ill., Sept. 14, 2012 /PRNewswire/ -- Taxpayers recovering from the current economic downturn will get at least some relief in 2013 by way of the mandatory upward inflation-adjustments called for under the tax code, according to CCH, a Wolters Kluwer business, a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com). CCH today released estimated income ranges for each 2013 tax bracket and also has projections for the growing number of other 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.
Projections this year, however, are clouded by the uncertainty of expiring provisions in the tax code. If Congress allows the so-called Bush-era tax cuts to expire at the end of 2012, many taxpayers could lose more ground than they will otherwise gain. These tax cuts, first enacted within Economic Growth Tax Recovery and Reconciliation Act of 2001 (EGTRRA) with a ten-year life, were last extended by the 2010 Tax Relief Act, but only for two years through 2012.
When there is inflation, indexing of brackets lowers tax bills by including more of taxpayers' incomes in lower brackets – in the existing 15-percent rather than the existing 25-percent bracket, for example. The formula used in indexing showed an average amount of inflation this year of about 2.5 percent – the highest in several years. Most 2013 figures therefore have moved higher.
For 2013, however, the big question - as it was in 2010 - is not whether the brackets will continue to increase because of inflation – they will. Rather, it is what tax rates will be applied against those brackets.
The current 10, 15, 25, 33 and 35-percent rates are now officially scheduled to sunset to the pre-EGTRRA rate structure of 15, 28, 31, 36 and 39.6-percent. While no one in Washington is calling for a full sunset of all the current tax rates, congressional gridlock might produce a cliffhanger on what will happen until after the November elections, and perhaps not even before January when the new, 113th Congress convenes. In the meantime, there are three possible alternative scenarios being debated by lawmakers:
In other words, it gets complicated quickly without knowing yet which approach Congress will take.
The examples below show the modest savings generated by indexing of the 2013 individual income tax rate brackets for taxpayers in three typical situations. In the third situation – a taxpayer in the highest rate bracket – tax outcomes are computed both with and without sunset of the current upper bracket rates.
Add to those savings the additional tax savings realized by slightly higher standard deduction and personal exemption amounts for 2013 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 contributions and more. Combined, inflation-based tax savings for 2013 can become substantial.
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 after 2013.
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 later. For example, amounts such as the 2013 vehicle depreciation limits won't be available until 2013 (the $3,160 regular first-year amount for 2012 was not released until March 2012), while the standard business mileage rate (that is currently set at 55.5 cents for 2012) isn't expected to be computed for 2013 and released until mid-December 2012.
CCH's projections for other indexed amounts are based on the relevant inflation data released September 14, 2012, 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
"The exemption amounts for the alternative minimum tax (AMT) are not indexed, which means that for each year Congress must either increase the amounts by statute or expose additional households to the AMT," Jones said.
For 2011, Congress set the AMT exemption amounts at $48,450 for single individuals and $74,450 for married couples filing jointly. Over the years 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. No amounts have been set for 2013, no less for 2012. While they are scheduled to revert to the default amounts of $33,750/$45,000 without action, the expectation is that Congress will once again extend the AMT exemption amounts at the higher levels.
Standard Deduction, Personal Exemption Rise
The additional standard deduction for those ages 65 or older or who are blind will rise by $50 to $1,200 in 2013 for married individuals and surviving spouses, and by $50 to $1,500 for single filers. The personal exemption amount also gets bumped up by inflation by $100, to $3,900 in 2013.
However, several wrinkles may occur if the EGTRRA sunset provisions move forward. The marriage penalty relief that has been built into the standard deduction for married couples filing jointly, as well as the tax rate brackets for joint filers, will be eliminated. Rather than double the standard deduction for unmarried single filers, the 2013 standard deduction for joint filers would drop by $2,050 to $10,150, even taking the past year's inflation into account.
For higher-income taxpayers, the limitations imposed on personal exemptions and itemized deductions based on income levels would also return in full force if EGTRRA were to sunset. Projected for inflation, those "phase-out" amounts would start for personal exemptions at $267,200 for joint filers and $178,150 for single filers and a phase-out range for itemized deductions would start at $178,150 for all filers except married couples filing separately whose phase-out range for itemized deductions starts at $89,075.
For a complete look at how income ranges for each tax bracket are projected to shift next, see the CCH charts at: http://www.cch.com/press/news/2012/20120914t.asp.
"Kiddie" Deduction, Gift Tax Exclusion
The Code only allows the gift tax exclusion 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. CCH projects that it will rise to $14,000 for 2013.
About CCH, a Wolters Kluwer business
SOURCE CCH, a Wolters Kluwer business