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Indexing Brings Some Tax Relief:
CCH Releases Tax Projections for 2005

(RIVERWOODS ILL. , September 22, 2004) – The indexing of many features of the tax code will bring some relief to taxpayers next year, but it is unclear whether that relief will be more than offset by the expiration of temporary tax breaks at the end of this year, according to CCH INCORPORATED (CCH), a leading provider of tax law information and software, which today released estimated income ranges for each 2005 tax bracket.

As things stand now, the size of the 10-percent bracket will shrink in 2005 for all taxpayers except those filing as head of household.  Married taxpayers filing jointly will lose two special breaks that applied to them in 2003 and 2004: an expanded 15-percent bracket and a standard deduction equal to twice that afforded a single taxpayer.  While a number of bills to extend these breaks have been introduced in Congress, none has passed so far.

Meanwhile, indexing operates year after year and has become a settled part of the tax code, according to George Jones, senior analyst for CCH.

“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 laws for the forseeable future irrespective of whether Congress plans to tinker more with the tax rates themselves,” Jones noted.

Interplay of Indexing, Tax Changes

“This also means that across-the-board inflation adjustments to the brackets provide more relief for those in the upper brackets, since they share in the reduction within each bracket, not just their own marginal tax bracket,” Jones noted.  He further observes, however, those inflation adjustments will not be made to the 10-percent bracket amounts until 2009.

Two examples show the interplay of the modest tax savings generated by indexing and the changes in the law due to take effect at the end of the year:

• A married couple filing jointly with total taxable income of $100,000 would pay $145 less in income taxes in 2005 due to indexing alone.  However, if Congress does not extend current tax provisions, the amount of their income taxed at 10 percent is scheduled to shrink from $14,300 to $12,000, and the top of their 15-percent bracket is scheduled to step down from $58,100 to $53,450, leaving more of their income taxable in the 25-percent bracket. The net effect for the joint filer with taxable income of $100,000 would be an increase of $580.

• A single filer with taxable income of $50,000 would have contributed $72.50 less next year because of inflation adjustments alone, but the shrinking of the 10-percent bracket could shrink those savings to only $7.50.

Inflation Adjustments

For more than a decade, the U.S. tax code has required that federal income tax brackets and certain other figures be adjusted for inflation annually. 

The adjustment is based on Consumer Price Index figures for September through August immediately prior to the adjusted year.  CCH’s projections are based on the relevant inflation data released September 16, 2004, by the U.S. Department of Labor. 

Annual 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.

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 from 2004 to 2005 by dollar amounts already written into the tax law.

“The maximum amount of modified adjusted gross income allowed for rolling over a regular IRA into a Roth IRA has been stuck at the $100,000 level since 1998 and will remain there for 2005, with no inflation adjustment. The limit on 401(k) plan elective deferrals, on the other hand, has a $1,000 increase built in by the Internal Revenue Code; that brings the maximum amount of pre-tax salary allowed to be socked away in a 401(k) plan to $14,000 in 2005,” Jones observed.

Standard Deduction, Personal Exemption Also Rise

The standard deduction and personal exemption amounts are also subject to indexing and in most cases (but with one very significant exception) these are projected to increase for 2005.  These increases can produce lower taxes by lowering the taxpayer’s taxable income.

• Single taxpayers could see a $150 increase over 2004 in their standard deduction, to $5,000.

• Married couples filing jointly would pick up an extra $300 in tax savings because of inflation adjustments for 2005 if expiring “marriage penalty relief” provisions of current law are extended, resulting in a standard deduction of $10,000 for these taxpayers.  But if the provisions are not extended, their standard deduction next year will be $8,700 – a decrease of $1,000 from 2004. 

The additional standard deduction for those age 65 or older or who are blind moves up $50 to $1,000 for married individuals and surviving spouses.  It increases for single filers by $50 also, to $1,250. The personal exemption amount will go up in 2004 by $100 to $3,200.

These inflation adjustments can add up over time.  For example, since 1988, the standard deduction for single taxpayers has grown by over 60 percent, from $3,000 to the anticipated $5,000 amount for 2005.

Taxpayers can, however, lose much 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 2005, married couples filing jointly will begin to lose some of the value of any itemized deductions when their adjusted gross income exceeds $145,950.  They will begin to lose some of the value of their personal exemptions when their adjusted gross income exceeds $218,950.  Starting in 2006, however, relief from this “stealth tax” will be available, thanks to a provision in the big 2001 Tax Law that finally will take effect.  In 2006 and 2007, the reduction in personal exemptions and itemized deductions is scheduled to be only 2/3^rd of what it is now and in 2005.

For a complete look at how income ranges for each tax bracket are projected to shift next year – with and without passage of "extenders" legislation – 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” standard deduction, used on the returns of children who are claimed as dependents on their parents’ returns increased in 2001, from $700 to $750, and jumped next to $800 for 2004.  For 2005, it remains at the $800 level.

The tax 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 2002, when the exemption increased to its current $11,000.  This year’s inflation figures don’t support a further increase, so the exemption will remain unchanged for 2005.

About CCH Tax and Accounting

CCH Tax and Accounting (www.tax.cchgroup.com), based in Riverwoods , Ill. , is a leading provider of tax, audit, and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913.

Among its market leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager™ and the U.S. Master Tax Guide®. CCH Tax and Accounting is a Wolters Kluwer company (www.wolterskluwer.com). Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2003) of €3.4 billion, employs approximately 18,750 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam , the Netherlands.

CCH INCORPORATED’s 2005 TAX PROJECTIONS1

Tax Bracket and Standard Deduction Changes If Pending “Extenders” Legislation Does Not Pass  

Married Filing Jointly (& Surviving Spouse)

Married Filing Separately

Single Filers

Head of Household

Standard Deduction Amounts

Tax Bracket and Standard Deduction Changes If Pending “Extenders” Legislation Passes²

Married Filing Jointly (& Surviving Spouse)

Married Filing Separately

Single Filers

Head of Household

Standard Deduction Amounts

Standard Deduction for Dependents (“Kiddie” Standard Deduction)³

Income Level At Which 3-Percent Itemized Deduction Limitation Takes Effect³

(Adjusted Gross Income)

Personal Exemption Amounts³

Threshold for Personal Exemption Phaseout³

Gift Tax Exemption³

1.) These numbers are projected for the 2005 tax year and provisions in the tax law in effect in September 2005 have not been confirmed by the Internal Revenue Service.

2.) Pending “extenders” legislation

• Retains the 10-percent bracket at current level (with inflation adjustment) for all taxpayers
• Expands the 15-percent bracket for married taxpayers filing jointly
• Sets the standard deduction for joint filers at 200 percent of the standard deduction for single filers

3) Not affected by expiring law or “extenders legislation.”

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