Every year, various amounts embodied in the Internal Revenue Code are adjusted to reflect the increase in consumer prices, or inflation, as measured by the Consumer Price Index (CPI). Compiled by the Bureau of Labor Statistics (http://www.bls.gov/CPI/), the index reflects the increase in individuals’ cost of living over time and is used by various government agencies to ensure that their programs accurately reflect current economic conditions. In the case of the Internal Revenue Service, tax rates, deductions, and various thresholds are adjusted annually for inflation, while the Social Security Administration (SSA) uses CPI to adjust benefit amounts paid to recipients. As CPI for 2009 will likely show a drop in overall consumer prices (deflation), many amounts tied to CPI will either remain unchanged or decrease in 2010.
For the first nine months of 2009, CPI for all urban areas (CPI-U) decreased by 0.9%, and the trend is likely to continue given the current state of both the US and world economies. Reflecting this deflationary condition, the IRS’ recently released revenue procedure detailing inflation-adjusted amounts for 2010 shows only minor increases in certain aspects while many other remain unchanged. Tax brackets, the income ranges to which given tax rates are applied, increased by a maximum of $700 between 2009 and 2010, compared with a maximum increased of $15,250 between 2008 and 2009. Similarly, the base tax amount at the highest tax rate (single filer) increased by $205 between 2009 and 2010, whereas the increase between 2008 and 2009 was $4,424. Following the trend, next year’s standard deductions were unchanged save those for individuals filing as head of household, who will see a $50 increase in the deduction to $8,400. In contrast, the standard deduction for head-of-household filers increased by $350 from 2008 to 2009. Contrary to prior media reports, however, the maximum contribution an individual can make to a qualified retirement account will remain unchanged in 2010. As the IRS press release indicates, a fall in CPI cannot result in a lower retirement contribution limitation, in accordance with the Social Security Act.
Not only does the Social Security Act stipulate that decreasing CPI cannot lower the contribution threshold for qualified retirement plans, but the Act also prevents benefit amounts and tax deductions from falling. As a result, recipients of Old Age, Survivors, and Disability Insurance (OASDI, or Social Security benefits) will see no increase in their payments for 2010 (without Congressional intervention). At the same time, the maximum amount of earned income subject to OASDI tax will remain unchanged at $106,800, marking the first time the Social Security Wage Base has not increased since cost-of-living adjustments were introduced. Coupled with the IRS revenue procedure, the Social Security Administration’s announcement shows just how widespread an impact a fall in consumer prices can have.
When the Internal Revenue Service released its inflation-adjusted amounts for 2010, the recession’s tax implications became much clearer. Unlike any year in recent memory, tax brackets and rates, deductions, and other thresholds will change imperceptibly, if at all. As wages have stagnated along with the economy, individuals are unlikely to see increases in their tax liability (the amount of tax they owe), which should come as welcome news to consumers struggling during this recession. Social Security beneficiaries, however, will suffer further due to the recession as payments will not increase in 2010.
IRS Revenue Rulings Providing Inflation-Adjusted Amounts
Consumer Price Index Data
Over the ten years from 1998 to 2008, CPI for all urban areas (CPI-U, used by the IRS) increased an average of 2.71%, while CPI-W (representing urban wage earners and clerical workers; used by the Social Security Administration), increased an average of 2.69%. In contrast, for the first nine months of 2009, CPI-U fell by 0.9% while CPI-W decreased by 1.47%, meaning many IRS and SSA amounts will either stay the same or decrease for 2010. The data below summarizes CPI data for 1998-2009 and was provided by the Bureau of Labor Statistics at http://www.bls.gov/CPI/.