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Taxpayers Will See Relief By Way of Inflation-adjusted Indexing, But Total Tax Impact Remains Unclear, CCH Says

Final Decision on Tax Brackets and Other Sunsetting Tax Provisions Will Determine Ultimate 2011 Tax Obligations  

(RIVERWOODS ILL., September 17, 2010) – Taxpayers stuck in the current economic downturn will get at least some relief in 2011 thanks to the mandatory upward inflation-adjustments called for under the tax code, according to CCH , which today released estimated income ranges for each 2011 tax bracket. CCH also projects 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,” according to 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 tax cuts within Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) to expire as called for at the end of 2010, many taxpayers could lose more ground than they will otherwise gain.

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 rather than the existing 25-percent bracket, for example. The formula used in indexing showed a relatively small amount of inflation this year, just under 1.5 percent. However, this is far greater in comparison to the 0.18 percent inflation factor used to set 2010 tax amounts. Therefore, while 2010 inflation-adjusted amounts in many cases stayed flat as a result, most 2011 figures will move higher.

For 2011, however, the big question 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 scheduled to sunset to the pre-EGTRRA rate structure of 15, 28, 31, 36 and 39.6 percent. In addition, there are two possible alternative scenarios being debated by lawmakers:

  • Extend the current tax bracket structure in its entirety; or
  • As the proposal from President Obama calls for, keep the current rate structure except revive the 36- and 39.6-percent rates, starting at a higher income bracket level; he would also amend the standard deduction so that it does not revive the marriage penalty that had been in place prior to EGTRRA.

In other words, Jones noted, it gets complicated quickly without knowing yet which approach Congress will take.

“While we were looking at the very real possibility of deflation in the tax adjustment required under the tax code last year, this year we are ’back to normal’ in the sense that the expected upward adjustment in tax benefits from 2010-2011 are taking place,” said Jones. “The only wildcard remains how Congress will deal with the sunsetting provisions. We may not know that until a possible lame-duck session of Congress this December.”

The examples below show the modest tax savings generated by indexing and how they would be reversed if the EGTRRA tax cuts were to expire wholesale:

  • Because of inflation adjustments, a married couple filing jointly with a total taxable income of $100,000 should pay $112.50 less in income taxes in 2011 than they will on the same income for 2010 (compared to only a $12.50 savings between 2009 and 2010). That savings remains whether the EGTRRA tax cuts are fully extended or President Obama’s proposal is adopted. However, if the rates and marriage penalty relief sunset entirely, the couple will end up paying $3,143 more in taxes in 2011.
  • A single filer with taxable income of $50,000 should owe $56 less next year due to the adjustments (again, compared to only a $6.25 savings between 2009 and 2010). However, once again, even with savings from the inflation adjustments, a single filer will owe $834 more in 2011 than in 2010 on the same $50,000 amount if complete sunset of the rates takes place.
  • For taxpayers with more than $379,150 in taxable income in both 2010 and 2011, the maximum savings from indexing the tax brackets for 2011 will be more dramatic. However, so will the additional tax that would be owed under either a complete sunset of the EGTRRA tax cuts or adoption of the Obama proposal, which would continue to give high-income taxpayers the incremental benefit of the 10-percent rate bracket as well as allow them an expanded 28-percent bracket. Inflation-generated savings if all rates were extended would amount to $330 for a single filer with $400,000 taxable income, for example. However, that same taxpayer would pay an additional $11,394 under a full sunset of the rates, and $5,080 more under the Obama proposal above 2010 amounts.

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 earlier this year adds an even greater number of inflation-adjustments to the tax code, although health-related indexing won’t start until 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 earlier and some later. For example, amounts such as the 2011 vehicle depreciation limits won’t be available until 2011 (the $3,060 regular first-year amount for 2010 was not released until February 2010), while the standard business mileage rate (that is currently set at 50 cents for 2010) isn’t expected to be computed for 2011 and released until December 2010.

CCH’s projections for other indexed amounts are based on the relevant inflation data released September 17, 2010, 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.

For 2009, Congress set the AMT exemption amounts at $46,700 for single individuals and $70,950 for married couples filing jointly. 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 yet for 2010, no less for 2011. While they are scheduled to revert to the default amounts of $33,750/$45,000 without action, the Obama administration tax proposals contemplate further increases.

Standard Deduction, Personal Exemption Rise

The standard deduction and personal exemption amounts are also subject to indexing; however, because of “rounding down,” some years show no change at all. After very little movement in the 2010 amounts, 2011 will see a jump in all standard deduction levels. However, a wrinkle occurs if the EGTRRA sunset provisions move forward. In which case, the marriage penalty relief that has been built into the standard deduction for married couples filing jointly will be eliminated. Rather than double the standard deduction for unmarried single filers, the 2011 standard deduction for joint filers would drop by $1,750 to $9,650, even taking the past year’s inflation into account.

Assuming that Congress will not let any of the standard deduction amounts sunset, however, the standard deduction for single taxpayers, heads of households and marrieds filing separately will all increase by $100 in 2011. The standard deduction for joint filers would rise by $200, to $11,600. 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 rise by $50 to $1,150 in 2011 for married individuals and surviving spouses, and by $50 to $1,450 for single filers. The personal exemption amount also gets bumped up by inflation by $50, to $3,700 in 2011.

Taxpayers 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. For 2010, these “phaseouts” disappeared from the tax code, but only temporarily if Congress does not act. As part of the EGTRRA sunset, they are scheduled to return in 2011, with a personal exemption phase-out range starting at $254,350 for joint filers and $169,550 for single filers and a phase-out range for itemized deductions starting at $169,550 for all filers except married couples filing separately whose phase-out range for itemized deductions starts at $84,775.

“The removal of limitations on itemized deductions and personal exemptions, rather than indexing of brackets, will provide major tax savings in 2010 for many well-off taxpayers. The return of these limitations in 2011 would pose an equally important change in the reverse direction,” Jones observed.

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 2010. It last rose for the 2009 tax year. For 2011 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 2011.

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. 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.

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nb-10-136

CCH 2011 TAX PROJECTIONS*

Married Filing Jointly (& Surviving Spouse)

Tax Rate

2011 Taxable Income

2010 Taxable Income

Complete Sunset

Full Extension

Obama Proposal

10%

n/a

$0-$17,000

$0-$17,000

$0-$16,750

15%

$0-$57,650

$17,000-$69,000

$0-$69,000

$16,750-$68,000

25%

n/a

$69,000-139,350

$69,000-$139,350

$68,000-$137,300

28%

$57,650-$139,350

$139,350-$212,300

$139,350-$237,300

$137,300-$209,250

31%

$139,350-$212,300

n/a

n/a

n/a

33%

n/a

$212,300-$379,150

n/a

$209,250-$373,650

35%

n/a

$379,150+

n/a

$373,650+

36%

$212,300-$379,150

n/a

$237,300-$379,150

n/a

39.6%

$379,150+

n/a

$379,150+

n/a

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

Tax Rate

2011 Taxable Income

2010 Taxable Income

Complete Sunset

Full Extension

Obama Proposal

10%

n/a

$0-$8,500

$0-$8,500

$0-$8,375

15%

$0-$34,500

$8,500-$34,500

$8,500-$34,500

$8,375-$34,000

25%

n/a

$34,500-$83,600

$34,500-$83,600

$34,000-$82,400

28%

$34,500-$83,600

$83,600-$174,400

$83,600-$195,550

$82,400-$171,850

31%

$83,600-$174,400

n/a

n/a

n/a

33%

n/a

$174,400-$379,150

n/a

$171,850-$373,650

35%

n/a

$379,150+

n/a

$373,650+

36%

$174,400-$379,150

n/a

$195,550-$379,150

n/a

39.6%

$379,150+

n/a

$379,150+

n/a

 Head of Household

Tax Rate

2011 Taxable Income

2010 Taxable Income

Complete Sunset

Full Extension

Obama Proposal

10%

n/a

$0-$12,150

$0-$12,150

$0-$11,950

15%

$0-$46,250

$12,150-$46,250

$12,150-$46,250

$11,950-$45,550

25%

n/a

$46,250-$119,400

$46,250-$119,400

$45,550-$117,650

28%

$46,250-$119,400

$119,400-$193,350

$119,400-$216,400

$117,650-$190,550

31%

$119,400-$193,350

n/a

n/a

n/a

33%

n/a

$193,350-$379,150

n/a

$190,550-$373,650

35%

n/a

$379,150+

n/a

$373,650+

36%

$193,350-$379,150

n/a

$216,400-$379,150

n/a

39.6%

$379,150+

n/a

$379,150+

n/a

 Married Individuals Filing Separate Returns

Tax Rate

2011 Taxable Income

2010 Taxable Income

Complete Sunset

Full Extension

Obama Proposal

10%

n/a

$0-$8,500

$0-$8,500

$0-$8,375

15%

$0-$28,825

$8,500-$34,500

$8,500-$34,500

$8,375-$34,000

25%

n/a

$34,500-$69,675

$34,500-$69,675

$34,000-$68,650

28%

$28,825-$69,675

$69,675-$106,150

$69,675-118,650

$68,650-$104,625

31%

$69,675-$106,150

n/a

n/a

n/a

33%

n/a

$106,150-$189,575

n/a

$104,625-$186,825

35%

n/a

$189,575+

n/a

$186,825+

36%

$106,150-$189,575

n/a

$118,650-$189,575

n/a

39.6%

$189,575+

n/a

$189,575+

n/a

 Standard Deduction Amounts

Filing Status

2011**

2010

Increase

Married Filing Jointly
(& Surviving Spouse)

$9,650 (with marriage penalty relief sunset);

$11,600 (without marriage penalty relief sunset)

$11,400

 

 

$11,400

(-$1,750)

 

 

$200

Married Filing Separately

$4,825 (with marriage penalty relief sunset)

$5,800 (without marriage penalty relief sunset

$5,700

 

 

$5,700

(-$875)

 

 

$100

Single

$5,800

$5,700

$100

Head of Household

$8,500

$8,400

$100

**A marriage penalty exists when the combined tax liability of a couple filing a joint return is greater than the sum of the tax liabilities each would have if they were unmarried. If the EGTRRA sunset takes effect, it will trigger a marriage penalty with the basic standard deduction for married individuals filing joint returns dropping considerably.

Standard Deduction for Dependents (“Kiddie” Standard Deduction)

2011

2010

Increase

$950

$950

$0

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

Filing Status

2011(with sunset)

2010***

2009

Married Filing Jointly
(& Surviving Spouse)

$169,550

n/a

$166,800

Married Filing Separately

$84,775

n/a

$83,400

Single

$169,550

n/a

$166,800

Head of Household

$169,550

n/a

$166,800

*** For 2010, these limitations disappeared from the tax code; if the limitation rules under EGTRRA are allowed to sunset, the above rates will apply for 2011.

Personal Exemption Amounts

2011

2010

Increase

$3,700

$3,650

$50

Threshold for Personal Exemption Phaseout

Filing Status

2011(with sunset)

2010****

2009

Married Filing Jointly
(& Surviving Spouse)

$254,350

n/a

$250,200

Married Filing Separately

$127,175

n/a

$125,100

Single

$169,550

n/a

$166,800

Head of Household

$211,950

n/a

$208,500

**** For 2010, these “phaseouts” disappeared from the tax code; if the phaseout rules under EGTRRA are allowed to sunset, the above phaseout levels will apply for 2011.

Gift Tax Exemption

2011

2010

Increase

$13,000

$13,000

$ 0

Income Limit for Full Roth IRA Contribution

Filing Status

2011

2010

Increase

Married Filing Jointly

$169,000

$167,000

$2,000

Single

$107,000

$105,000

$2,000

* These numbers are projected for the 2011 tax year and have not been confirmed by the Internal Revenue Service.

 

       


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