You just might pay less in taxes next year – but no thanks to the politicians in Washington. Nope, you can thank inflation.
No one likes paying taxes, but there’s some good news on the horizon: Taxes for many people will go down next year. This will happen despite the political gridlock that has seized Washington, so neither party can claim the credit.
If you’ve been to the grocery store or gas station lately, you know that prices are rising. But while inflation is bad news for the budget, it’s good news for taxpayers. That’s because the IRS uses inflation stats to adjust tax brackets every year to fight “bracket creep:” something that would happen if inflation-indexed wages unfairly pushed people into higher tax brackets.
In other words, if your pay doesn’t go up next year, at least your taxes might go down.
In the video below, Money Talks News founder Stacy Johnson explains how the tax code works – and who stands to benefit most. And we’ve got more details on the other side…
So as Stacy explained, since the value of the standard deduction, personal exemptions and tax brackets rise as inflation increases, all things being equal, your taxable income should decline next year.
Here are the three terms you need to know…
- Personal Exemptions. Exemptions are an amount you get to subtract before arriving at your taxable income, so the higher the better. For 2011, the personal exemption amount was $3,700 -unchanged from the year before. But for 2012, thanks to inflation, it’s estimated by tax publisher CCH to rise to $3,800. If that turns out to be the case, that’s $100 less you’ll be paying taxes on.
- Standard Deduction. When you file your taxes, you have the option of itemizing your deductions or just taking the standard deduction. If you have a lot of tax-deductible expenses, such as interest on a mortgage or charitable donations, you’ll probably save more money by itemizing. If not, you’ll claim the standard deduction. Like the personal exemption, this too is indexed to inflation. If CCH’s estimate is correct, married couples filing jointly will have a $11,900 standard deduction in 2012, an increase of $300 over the 2011 amount. Single filers will have a standard deduction of $5,950, up $150 from 2011.
- Tax-Bracket Adjustments. Of the three parts of the income tax code that are indexed to inflation, this is the one can have the greatest effects on those who earn the most. If you understand marginal tax rates, you know that different parts of your income are taxed at different rates. For example, in 2011, the first $8,500 of taxable income earned by a single person was subject to a Federal Income Tax rate of 10 percent, and earnings from $8,500 to $34,500 were taxed at 15 percent. Fortunately, these thresholds rise every year, depending on inflation. In 2012, those first two brackets are estimated to move to $8,700 and $35,550. The top bracket of 35 percent, applied on income more than $379,150 in 2011, will move to $388,351 in 2012.
As Stacy pointed out in the video above, while inflation adjustments apply to all taxpayers, those who make the most benefit the most. According to CCH, a married couple with taxable income of $100,000 will owe $190 less in income taxes in 2012 than 2011. A married couple with taxable income of $450,000 in 2012 would pay $732 less in taxes.
At a time when everyone seems to be simultaneously complaining about high taxes and the fact that the government is running a deficit, it’s nice to know that at least some part of our tax code is making sure that your tax bill for next year doesn’t rise unchecked by inflation.