The Impact of Zero Inflation

Welcome to the year of the un-COLA.

Tax rates, government benefits, and tax breaks designed to keep pace with inflation through annual cost-of-living adjustments and indexing won’t budge in 2010. You won’t earn much on your savings, either. Welcome to the year of the un-COLA.

No Payroll-Tax Boost

High-income workers, rejoice: The maximum amount of wages subject to Social Security taxes will remain at $106,800, the first time the index hasn’t changed since 1971. The tax rates stay the same, too: 6.2% for Social Security and 1.45% for Medicare, paid by both employers and employees. The Medicare portion is not capped and applies to all wages.

No Hike for Interest Rates

Yields on one-year certificates of deposit continue to hover around 1%, on average, and the typical money-market account pays less than half that much.

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Income-Tax Status Quo

Normally, tax brackets are indexed to inflation: More income gets included in lower brackets, lowering everyone’s tax bill. For 2010, there will be only minor adjustments. And the vast majority of taxpayers who don’t itemize will get the same standard deduction as in 2009—$5,700 for individuals and $11,400 for married couples. The personal-exemption amount will remain steady at $3,650 for every taxpayer, spouse and dependent.

Social Security Freeze

For the first time since automatic cost-of-living adjustments were instituted in 1975, Americans won't see an increase in their retirement and disability benefits. But Congress might agree to send each of the 57 million beneficiaries a check for $250.

Flat Retirement-Savings limits

The IRS kept maximum contributions to 401(k) plans and similar retirement plans at 2009 levels. That means you can deposit up to $16,500 of your salary into your retirement plan in 2010 and up to $22,000 if you are 50 or older. IRA contribution limits also remain the same: $5,000, plus an extra $1,000 in catch-up contributions for workers (and their spouses) 50 and older.

Mary Beth Franklin
Senior Editor, Kiplinger's Personal Finance