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2010 Tax Brackets Change Little Due to Inflation

To keep taxpayers from being pushed into higher tax brackets or from losing tax benefits simply because of inflation, the federal tax code since the 1980s has included inflation adjustments for tax brackets, exemptions, high-income phase-outs of various deductions and limitations, allowable retirement savings and the annual gift-tax exclusion, just to mention a few.  For example, indexing tax brackets lowers tax bills when there is inflation by including more of one’s income in a lower bracket, such as the 15% rather than the 25% bracket.

In 2010, for the first time ever, those inflation adjustments will be virtually nil because of a very low inflation rate.  This means that taxpayers with the same taxable income in 2010 as in 2009 will not see much of a tax savings due to inflation.  For example, joint filers with a taxable income of $100,000 will pay approximately $13 less in income taxes in 2010 than on the same income for 2009, compared with a $313 savings between 2008 and 2009.  A single filer with taxable income of $50,000 will owe $6 less next year, compared to a $156 savings due to the significantly higher inflation rate between 2008 and 2009.

The lack of change for 2010 creates a level playing field for taxpayers from all brackets, but those with high incomes actually stand to benefit in 2010 because “stealth taxes,” those that don’t involve changing tax rates, are being phased out. Among them are limits on itemized deductions and personal exemption amounts.

If you have questions, please call this office at 888-564-5777.