The U.S. Bureau of Labor Statistics reported today that the consumer price index (CPI) has dropped off by .2%. The dip was not expected and is the first decline in more than a year; the last such decline was April 2013. In contrast, if you take out adjustments for food and energy, the core CPI didn't budge at all: it's the first time that's happened in four years.
The CPI measures the cost of goods and services. When the CPI doesn't change much, it tends to signal that interest rates will stay put. This is important for taxpayers because the Tax Code provides for mandatory annual adjustments to certain tax items based on inflation. Of those tax items subject to mandatory annual adjustments, federal income tax brackets tend to get the most attention since have been subject to adjustment for nearly 30 years. However, inflation adjustments are now routinely included in new tax legislation which can be confusing for taxpayers. Luckily, there are tax professionals out there who can sort it all out for you.
Today, Bloomberg BNA released their predictions for the coming tax year and they're betting on the idea that most taxpayers will find a little bit of relief in 2015. George Farrah,
The good news is that people whose income is the same compared to last year may enjoy a lower effective tax rate – and a lower tax bill – because of the inflation adjustments. The higher consumer price index will impact next year’s tax brackets, standard deductions, and other inflation-adjusted elements of the tax code.
How does that translate into real life dollars? Here's what you need to know...
Tax Brackets
Brackets (not rates) will nudge upward. Together with increases in the standard deduction and exemption amounts (see below), taxes should decrease for many taxpayers. Here's what the rates should look like:
Individual
Head of Household*
Personal Exemption
For 2015, the personal exemption amount is projected to be $4,000, up from $3,950 in 2014. For high-income taxpayers, the personal exemption deduction is phased out.
Standard Deduction
For 2015, the amount of the standard deduction is up slightly. About 2/3 of all taxpayers will file using the standard deduction: those taxpayers who have more in itemized deductions than the standard deduction amount will file a Schedule A. Here's what the numbers should look like:
Alternative Minimum Tax (AMT)
You may recall that I was shocked in 2013 when, instead of the "band-aid" treatment for taxpayers, the AMT exemption rate was permanently subject to inflation. We'll see that adjustment play out in 2015. Bloomberg BNA anticipates that the exemption amounts will be $53,600 for individuals; $83,450 ($83,400) for married couples filing jointly; $41,725 ($41,700) for married couples filing separately; and $23,800 for estates and trusts.
So what gives with the parenthesis? Well, in previous years, Bloomberg BNA believes the IRS made an error figuring the amounts under the Tax Code. The above amounts are those Bloomberg BNA believes to be correct while the amounts in parenthesis are those amounts Bloomberg BNA expects the IRS to publish. You'll see similar confusing numbers in the report as it applies to AMT phaseout amounts... Nobody claimed that AMT was easy.
Federal Estate Tax Exclusion
The federal estate tax exclusion for decedents dying in 2014 was $5.34 million each or, with portability, $10.68 million per married couple. Bloomberg BNA projects this amount will edge up to $5.43 million each in 2015, making the total for married couple a whopping $10.86 million.
Gift Tax Exclusion
Nothing to see here, folks: the annual exclusion for federal gift tax purposes will remain at $14,000 in 2015.
Student Loan Interest Phaseouts
Phaseouts apply to the $2,500 deduction for student loan interest: that means that as incomes go up, the deduction goes down. For 2015, phaseouts begin when modified adjusted gross income (MAGI) is $65,000 ($130,000 for joint returns), and is completely phased when MAGI hits $80,000 ($160,000 for joint returns).
First Time Adjustments Related To Obamacare
There are a handful of first time adjustments as a result of the Affordable Care Act and related legislation. Some of those include:
- The cap on contributions to health flexible spending accounts (FSAs) will be adjusted to $2,550. Prior to 2013, there was no limit at all on health FSA contributions. The $2,500 cap in place for 2013 will increase slightly.
- The penalty imposed on employers failing to offer minimum essential coverage to their employees for any month is $2,080 times the number of qualifying full-time employees during such month (reduced by 80).
- The penalty on employers who offer coverage but have employees who qualify for premium tax credits is $3,120 times the number of individuals to which an applicable premium tax credit or cost-sharing reduction is allowed or paid.
- The penalty for failure to maintain minimum essential coverage is $325.
The 2015 tax inflation projections are just one of the features from Bloomberg BNA. The full report - with lots more info - is available free online here (downloads as a pdf).
It's worth noting that these are just projections. Granted, they're educated projections and the folks at Bloomberg BNA have been doing this awhile but still: don't count your tax chickens before they hatch. The IRS will publish the official rates and tax preference items for 2015 later this year in a Revenue Procedure. It happens every year - generally in October - and you can bet that I'll have all of the information for you here with Forbes. Keep reading!
*corrected from original projections
