Introduction
Every year, the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent what is called “bracket creep.” This is the phenomenon by which people are pushed into higher income tax brackets or have reduced value from credits or deductions due to inflation, instead of any increase in real income.
The IRS uses the Consumer Price Index (CPI) to calculate the past year’s inflation and adjusts income thresholds, deduction amounts, and credit values accordingly. Rather than directly adjusting last year’s values for annual inflation, each provision is adjusted from a specified base year. For more information, see Methodology, below.
Estimated Income Tax Brackets and Rates
In 2016, the income limits for all brackets and all filers will be adjusted for inflation and will be as follows (Table 1). The top marginal income tax rate of 39.6 percent will hit taxpayers with taxable income of $415,050 and higher for single filers and $466,950 and higher for married filers.
Table 1. 2016 Taxable Income Brackets and Rates (Estimate) |
|||
Rate |
Single Filers |
Married Joint Filers |
Head of Household Filers |
10% |
$0 to $9,275 |
$0 to $18,550 |
$0 to $13,250 |
15% |
$9,275 to $37,650 |
$18,550 to $75,300 |
$13,250 to $50,400 |
25% |
$37,650 to $91,150 |
$75,300 to $151,900 |
$50,400 to $130,150 |
28% |
$91,150 to $190,150 |
$151,900 to $231,450 |
$130,150 to $210,800 |
33% |
$190,150 to $413,350 |
$231,450 to $413,350 |
$210,800 to $413,350 |
35% |
$413,350 to $415,050 |
$413,350 to $466,950 |
$413,350 to $441,000 |
39.6% |
$415,050+ |
$466,950+ |
$441,000+ |
Source: Author’s Calculations. |
Standard Deduction and Personal Exemption
The standard deduction for single and married couples filing jointly will not increase in 2016 (Table 2). For taxpayers filing as head of household, it will increase by $50 from $9,250 to $9,300.
The personal exemption for 2016 will be $4,050.
Table 2. 2016 Standard Deduction and Personal Exemption (Estimate) |
|
Filing Status |
Deduction Amount |
Single |
$6,300.00 |
Married Filing Jointly |
$12,600.00 |
Head of Household |
$9,300.00 |
Personal Exemption |
$4,050.00 |
Source: Author’s Calculations. |
PEP and Pease
PEP and Pease are two provisions in the tax code that increase taxable income for high-income earners. PEP is the phase-out of the personal exemption and Pease (named after former Senator Donald Pease) reduces the value of most itemized deductions once a taxpayer’s adjusted gross income reaches a certain amount.
The income threshold for both PEP and Pease will be $259,400 for single filers and $311,300 for married filers (Tables 3 and 4). PEP will end at $381,900 for singles and $433,800 for married couples filing jointly, meaning these taxpayers will no longer have a personal exemption.
Table 3. 2016 Pease Limitations on Itemized Deductions (Estimate) |
|
Filing Status |
Income |
Single |
$259,400.00 |
Married Filing Jointly |
$311,300.00 |
Head of Household |
$285,350.00 |
Source: Author’s Calculations. |
Table 4. 2016 Personal Exemption Phase-Out (Estimate) |
||
Filing Status |
Phase-Out Begin |
Phase-Out Complete |
Single |
$259,400.00 |
$381,900.00 |
Married Filing Jointly |
$311,300.00 |
$433,800.00 |
Head of Household |
$285,350.00 |
$407,850.00 |
Source: Author’s Calculations. |
Alternative Minimum Tax
Since its creation in the 1960s, the Alternative Minimum Tax (AMT) has not been adjusted for inflation. Thus, Congress was forced to “patch” the AMT by raising the exemption amount to prevent middle class taxpayers from being hit by the tax as a result of inflation.
On January 2, 2013, the American Taxpayer Relief Act of 2012 indexed the income thresholds to inflation, preventing the necessity for an annual “patch.”
The AMT exemption amount for 2016 is $53,900 for singles and $83,800 for married couples filing jointly (Table 5).
Table 5. 2016 Alternative Minimum Tax Exemptions (Estimate) |
|
Filing Status |
Exemption Amount |
Single |
$ 53,900.00 |
Married Filing Jointly |
$ 83,800.00 |
Married Filing Separately |
$ 41,900.00 |
Source: Author’s Calculations. |
Earned Income Tax Credit
2016’s maximum Earned Income Tax Credit for singles, heads of households, and joint filers is $506, if the filer has no children (Table 6). The credit is $3,373 for one child, $5,572 for two children, and $6,268 for three or more children.
Table 6. 2016 Earned Income Tax Credit Parameters (Estimate) |
|||||
Filing Status |
No Children |
One Child |
Two Children |
Three or More Children |
|
Single or Head of Household |
Income at Max Credit |
$6,610 |
$9,920 |
$13,930 |
$13,930 |
Maximum Credit |
$506 |
$3,373 |
$5,572 |
$6,268 |
|
Phase out Begins |
$8,270 |
$18,190 |
$18,190 |
$18,190 |
|
Phase out Ends (Credit Equals Zero) |
$14,880 |
$39,296 |
$44,648 |
$47,955 |
|
Married Filing Jointly |
Income at Max Credit |
$6,610 |
$9,920 |
$13,930 |
$13,930 |
Maximum Credit |
$506 |
$3,373 |
$5,572 |
$6,268 |
|
Phase out Begins |
$13,810 |
$23,730 |
$23,730 |
$23,730 |
|
Phase out Ends (Credit Equals Zero) |
$20,420 |
$44,836 |
$50,188 |
$53,495 |
|
Source: Author’s Calculations. |
Methodology
Each tax parameter is adjusted for inflation by taking its base value (from legislation) and multiplying it by the current fiscal year’s average Consumer Price Index (CPI) and then dividing that by the base fiscal year’s CPI.
Each parameter is rounded to either the nearest $10, $25, or $100 (depending on the specified rounding method in the legislation, see Table 7).
For example, the base value for the top of the 10 percent tax bracket for singles is $7,000. This number is multiplied by the average CPI for fiscal year 2016 (236.749) and then divided by the average CPI for fiscal year 2002 (178.675): $7,000 x (236.749/178.674) = $9,275.18. This value is then rounded down to the nearest $25 to yield 2016’s 10 percent tax bracket of $9,275.
Table 7. Tax Parameters, Base Years, and Base Values |
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Base Year |
Parameter |
Base Value (Single; HoH; Married) |
Rounding Convention |
1987 |
Standard Deduction |
$3,000; $4,400; $6,000 |
Down to nearest $50 |
1988 |
Personal Exemption |
$2,000 |
Down to nearest $50 |
1992 |
15% Bracket |
$22,100; $29,600; $44,200 |
Down to nearest $50 |
25% Bracket |
$53,500; $76,400; $89,150 |
Down to nearest $50 |
|
1993 |
28% Bracket |
$115,000; $127,500; $140,000 |
Down to nearest $50 |
33% Bracket |
$250,000; $250,000; $250,000 |
Down to nearest $50 |
|
1995 |
EITC |
See Table 8, below |
Nearest $10, for thresholds. Nearest $1, for credit amount. |
2002 |
10% Bracket |
$7,000; $10,000; $14,000 |
Down to nearest $25 |
2008 |
EITC Marriage Penalty Fix |
$5,000 |
Nearest $10 |
2011 |
AMT |
$50,600, N/A, $78,750 |
Nearest $100 |
2012 |
35% Bracket |
$400,000; $425,000; $450,000 |
Down to nearest $50 |
PEP |
$250,000; $275,000; $300,000 |
Down to nearest $50 |
|
Pease |
$250,000; $275,000; $300,000 |
Down to nearest $50 |
|
Note: Bracket values are the tops of each bracket. |
Table 8. EITC Base Parameters |
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No Children |
One Child |
Two Children |
Three or More Children |
|
Credit Rate |
7.65% |
34% |
40% |
40% |
Phase-Out Rate |
7.65% |
15.98% |
21.06% |
21.06% |
Income, Max Credit |
$4,220 |
$6,330 |
$8,890 |
$8,890 |
Income, Phase-Out |
$5,280 |
$11,610 |
$11,610 |
$11,610 |
by Kyle Pomerleau | Oct 14, 2015
Author: Kyle Pomerleau
Source: Tax Foundation
Retrieved from: www.taxfoundation.org