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Professor Releases Summary of 2007 Inflation Adjustments That Affect Individuals

Posted on September 18, 2006 by James C. Young
Article originally published in
Tax Notes Today on September 18, 2006.

AUGUST 2006 CPI = 203.9

A SUMMARY OF 2007 INFLATION ADJUSTMENTS IMPACTING INDIVIDUALS:
STANDARD DEDUCTIONS, EXEMPTIONS (AND PHASE-OUTS),
ITEMIZED DEDUCTION LIMIATIONS, AND TAX RATE SCHEDULES

According to Code § 1(f) [and §§ 63(c)(4) and 151(d)(3)] the standard deduction, the exemption amounts and the tax rate schedules are to be adjusted on a straight percentage increase by the increase in the Consumer Price Index (CPI). The CPI used for these computations is the index for all-urban consumers published by the Department of Labor [ § 1(f)(5)]. Any increases computed in the standard deduction, exemption amount, or tax rate bracket amounts are rounded down to the next lowest multiple of $50 ($25 for married, filing separate) [ § 1(f)(6)]. Similar adjustments are made to the AGI amounts used to phase-out exemptions and limit total itemized deductions.

The increase in CPI is determined by comparing the average CPI for any 12-month period ending August 31 with the average CPI for the appropriate base period. The base period CPI's are drawn from various Internal Revenue Service documents and prior year CPI data. The tax rate schedules base period CPI is established by Code § 1 (after amendment by the Revenue Reconciliation Act of 1993 and the Taxpayer Relief Act of 2000).

                            Base Period is                   Adjustment First


 Item                       the 12 Month     Base Period CPI Occurs in Calendar
                            Period Ending                    Year
 Standard deduction         August 31, 1987  111.9833333         1989
 Exemptions                 August 31, 1988  116.6166667         1990
 Exemption phase-out        August 31, 1990  128.0583333         1992
 Itemized deduction
 limitation (3% of AGI)     August 31, 1990  128.0583333         1992
 Annual gift tax exclusion  August 31, 1997  159.4916667         1999
 Tax rate schedules:
 10% bracket                August 31, 2002  178.6750000         2004
 15%/25%/28% brackets       August 31, 1992  138.9250000         1994
 33%/35% brackets           August 31, 1993  143.1750000         1995

2007 Inflation Factors. For the 12-month period ended August 31, 2006, the average CPI for all-urban consumers is 200.2916667. As a result, the 2007 inflation factors are as follows:

                                                                Inflation


                                                                Adjustment
                                                                Factor
              Item      CPI Difference                          [1 + (CPI
                                                                Difference/
                                                                Base Period
                                                                CPI)]
 Standard deduction     200.2916667 - 111.9833333 = 88.3083333   1.7885846
 Exemptions             200.2916667 - 116.6166667 = 83.6750000   1.7175218
 Exemption phase-out    200.2916667 - 128.0583333 = 72.2333333   1.5640659
 Itemized deduction
 limitation (3% of AGI) 200.2916667 - 128.0583333 = 72.2333333   1.5640659
 Tax rate schedules:
 10% bracket            200.2916667 - 178.6750000 = 21.6166667   1.1209832
 15%/25%/28% brackets   200.2916667 - 138.9250000 = 61.3666667   1.4417252
 33%/35% brackets       200.2916667 - 143.1750000 = 57.1166667   1.3989290

Standard Deduction Amounts. According to statute, the 1988 standard deduction amounts are used as the base. After adjustment for inflation, the 2007 standard deduction amounts will be as follows (2006 mounts for comparison):

                                                    2007      2006


 Single individual                               $ 5,350      $ 5,150
 Married, filing joint and Surviving spouse       10,700       10,300
 Head of household                                 7,850        7,550
 Married, filing separate                          5,350        5,150

Exemption Amounts. After adjustment for inflation, the 2007 exemption amount will be $3,400 (up from $3,300 in 2006). The 1989 exemption amount of $2,000 is used as the base.

Phase-Out of Exemptions. Since 1991, exemption deductions are phased-out as the taxpayer's AGI exceeds a threshold amount. All exemption amounts claimed on a return are reduced by 2% for each $2,500 (or fraction thereof) of AGI in excess of the appropriate threshold amount. In 2006 and 2007, the overall reduction is limited to two-thirds (2/3) of the calculated amount. The AGI threshold amounts for 2007 will be as follows (2006 amounts for comparison):

                                       2007                       2006


                          Phase-Out   Phase-Out      Phase-Out   Phase-Out
                          Begins When Completed When Begins When Completed When
                          AGI Exceeds AGI Exceeds    AGI Exceeds AGI Exceeds
 Single individual         $ 156,400   $ 278,900     $ 150,500     $ 273,000
 Married, filing joint
 and Surviving spouse         234,600     357,100      225,750       348,250
 Head of household            195,500     318,000      188,150       310,650
 Married, filing separate     117,300     178,550      112,875       174,125

Overall Limitation on Itemized Deductions. Total itemized deductions otherwise allowable are reduced by 3% of a taxpayer's AGI in excess of specified threshold amounts. In 2006 and 2007, the overall reduction is limited to two-thirds (2/3) of the calculated amount. The threshold amounts for 2007 will be as follows (2006 amounts for comparison):

                                                        2007         2006


 All taxpayers except Married, filing separately    $ 156,400    $ 150,500
 Married, filing separately                            78,200       75,250

Annual Gift Tax Exclusion. After adjustment for inflation, the 2007 annual gift tax exclusion amount will be $12,000 (the same as 2006).

Tax Rate Schedules. After adjustment for inflation, the 2007 tax rate schedules are presented on the following page. For comparison, 2006 tax rate schedules are also presented.

 Single ['1(c)]:



 If taxable income is:                        The tax is:
 Not over $7,825 . . . . . . . . . . . .      10% of taxable income.
 Over $7,825 but not over $31,850 . . . .     $782.50, plus 15% of the
                                              excess over $7,825.
 Over $31,850 but not over $77,100 . . .      $4,386.25, plus 25%
                                              of the excess over $31,850.
 Over $77,100 but not over $160,850 . . .     $15,698.75, plus 28% of the
                                              excess over $77,100.
 Over $160,850 but not over $349,700 . .      $39,148.75, plus 33% of the
                                              excess over $160,850.
 Over $349,700 . . . . . . . . . . . . .      $101,469.25, plus 35% of
                                              the excess over $349,700.

 Head of Household [ § 1(b)]:
 If taxable income is:                        The tax is:
 Not over $11,200 . . . . . . . . . . . . . . 10% of taxable income.
 Over $11,200 but not over $42,650 . . . .    $1,120.00, plus 15% of
                                              the excess over $11,200.
 Over $42,650 but not over $110,100 . . .     $5,837.50, plus 25%
                                              of the excess over $42,650.
 Over $110,100 but not over $178,350 . .      $22,700.00 plus 28%
                                              of the excess over $110,100.
 Over $178,350 but not over $349,700 . .      $41,810.00, plus 33%
                                              of the excess over $178,350.
 Over $349,700 . . . . . . . . . . . . . . .  $98,355.50, plus 35% of
                                              the excess over $349,700.

 Married, Filing Joint and Surviving Spouse
 [ § 1(a)]:
 If taxable income is:                        The tax is:
 Not over $15,650 . . . . . . . . . . . . . . 10% of taxable income.
 Over $15,650 but not over $63,700 . . . .    $1,565.00, plus 15% of
                                              the excess over $15,650.
 Over $63,700 but not over $128,500 . . .     $8,772.50, plus 25% of
                                              the excess over $63,700.
 Over $128,500 but not over $195,850 . .      $24,972.50, plus 28% of
                                              the excess over $128,500.
 Over $195,850 but not over $349,700 . .      $43,830.50, plus 33% of
                                              the excess over $195.850.
 Over $349,700 . . . . . . . . . . . . . . .  $94,601.00, plus 35% of
                                              the excess over $349,700.

 Married, Filing Separate [ § 1(d)]:
 If taxable income is:                         The tax is:
 Not over $7,825 . . . . . . . . . . . . . . . 10% of taxable income.
 Over $7,825 but not over $31,850 . . . . .    $782.50, plus 15% of the
                                               excess over $7,825.
 Over $31,850 but not over $64,250 . . . .     $4,386.25, plus 25%
                                               of the excess over $31,850.
 Over $64,250 but not over $97,925 . . . .     $12,486.25, plus 28% of
                                               the excess over $64,250.
 Over $97,925 but not over $174,850 . . .      $21,915.25, plus 33% of
                                               the excess over $97,925.
 Over $174,850 . . . . . . . . . . . . . . .   $47,300.50, plus 35% of
                                               the excess over $174,850.

 Estates and Trusts [ § 1(e)]:

 If taxable income is:                         The tax is:
 Not over $2,150 . . . . . . . . . . . . . . . 15% of taxable income.
 Over $2,150 but not over $5,000 . . . . . .   $322.50, plus 25% of the
                                               excess over $2,150.
 Over $5,000 but not over $7,650 . . . . . .   $1,035.00, plus 28% of
                                               the excess over $5,000.
 Over $7,650 but not over $10,450 . . . . .    $1,777.00, plus 33%
                                               of the excess over $7,650.
 Over $10,450 . . . . . . . . . . . . . . .    $2,701.00, plus 35% of
                                               the excess over $10,450.


James C. Young, a professor of accountancy at Northern Illinois University, has prepared the annual summary of inflation adjustments that affect individual taxpayers.