It's time for taxpayers to tip their hats in gratitude to an economic force that customarily earns far more curses than kudos: inflation.
That's the insidious force that used to systematically march taxpayers into higher tax brackets simply because their salaries rose to keep up with the cost of living. Now, when inflation eats away at the value of your dollars, at least the tax system is adjusted so you're not also hit with a stealth tax increase.
With the August inflation numbers released by the government on Sept. 19, Kiplinger's is able to calculate inflation adjustments for 2008 -- the numbers you'll use when you file your 2008 tax return in the spring of 2009. It will be weeks before the IRS gets around to officially announcing the changes triggered by the inflation numbers. But you don't have to wait.
The personal exemption -- which you claim for yourself and each dependent -- will rise to $3,500 for 2008, up $100 from the 2007 level. For folks in the 25% bracket, that saves 25 bucks for each exemption claimed. For a husband and wife with two kids, the savings will add up to $100.
The standard deduction -- which is used by nearly two-thirds of all taxpayers -- will increase for each filing status. Singles will enjoy a $100 hike, to $5,450 from this year's $5,350. Married couples filing jointly will see their standard deduction rise to $10,950, $250 more than they will claim on 2007 returns. The standard deduction for heads of household who do not itemize deductions will increase $150, to $8,000 on 2008 returns.
The tax brackets will become broader; meaning more of your income will be taxed at lower rates. The 10% bracket on 2008 joint returns will cover the first $16,050 of taxable income, Kiplinger's estimates. That's $400 more than in 2007. Taxing that amount at 10% rather than 15% will save couples $20. Not enough for a wild celebration, perhaps, but the higher your income, the more you save as more dollars fall into lower brackets. As the top of the 15% bracket rises, for example, some income that used to be taxed at 25% will be hit by the 15% rate.
Adjusting the tax law for inflation means that if your income stays the same, your tax bill will decline in 2008, regardless of whether lawmakers in Washington enact tax cuts.
The higher standard deduction and exemption amounts and the inflation-adjusted tax brackets will trigger a $130 savings for a single person who earns $50,000 and claims the standard deduction on his or her 2008 tax return. A married couple who earn $100,000 in '07 and '08 and who have two children will enjoy a $310 savings thanks to the inflation adjustments. Remember the new numbers presented here are for the 2008 tax year. So, you'll use them -- and reap the savings -- when you file your 2008 return in the spring of 2009.
Other inflation adjustments
In addition to the tax brackets and personal exemption and standard deduction amounts, several other sections of the tax code are adjusted for inflation. Here are numbers that will apply for 2008 tax returns.
Extra standard deduction for taxpayers 65 and older. Married taxpayers age 65 and older will be allowed to add $1,050 to the regular standard deduction (the same as on 2007 returns) and singles will get an extra $1,350 (up from $1,300 in'07).
Kiddie tax trigger. The amount of investment income a child under age 19 -- or a full-time student under 24 -- can earn before excess earnings are taxed at his or her parents' rate will rise to $1,800 for 2008, up $100 from 2007.
Itemized deduction phase out. Taxpayers will begin to lose the value of their itemized deductions after taxable income passes $159,950 in 2007; that's $3,550 higher than the $156,400 trigger point for 2007.
Personal exemption phase out. The income levels at which the value of personal exemptions begin to disappear will also rise in 2008. For single taxpayers, the trigger point will be $159,950 (up from $156,400 in 2007); for married couples, $239,950 (up from $234,600); and for heads of households, $199,950 (up from $195,500). The rising trigger points save money for taxpayer with incomes above these levels.
Tax-free parking and transit passes. Employers will be allowed to give employees parking valued at $220 a month as a tax-free fringe benefit in 2008. The 2007 maximum is $215 a month. The tax-free limit for transit passes will rise from $110 to $115 a month.
Social Security wage base. This amount -- after which the 6.2% Social Security tax no longer applies -- is not affected by the inflation number released by the government today. It does rise each year, however, based on average wage data that won't be announced until later in the year. Kiplinger's estimates that the wage base will break six figures in 2008, rising from $97,500 this year to around $102,000 in 2008.
2008 Tax Tables
Following are the 2008 tax brackets, based on the inflation adjustments.
Married couples filing jointly
Heads of household