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Taxpayers Should Get a Head Start on Tax
Planning for 2007
The indexing of many features of the tax code will bring some
relief to taxpayers next year, according to CCH, a Wolters
Kluwer business, which recently released estimated income ranges
for each 2007 tax bracket.
Unlike many changes to the tax laws that are effective for
only limited periods of time, indexing has become well
established within the tax code.
Inflation Adjustments. Since the late 1980s, the Code has
required that federal income tax brackets be adjusted for
inflation annually, and inflation adjustments have been inserted
into the Internal Revenue Code in recent years with increasing
frequency. For example, the Code now requires over 50 other
inflation-driven computations to determine deduction, exemption
and exclusion amounts in addition to the 40 separate
computations needed to inflation-adjust the tax bracket tables
each year. Tax legislation in 2006 added to the number of
required inflation adjustments.
The adjustments are based on Consumer Price Index figures for
September through August immediately prior to the adjusted year.
CCH's projections are based on the relevant inflation data
released Sept. 15, 2006, by the U.S. Department of Labor.
The IRS usually releases official numbers by December each
year. CCH tax bracket projections are provided for illustrative
purposes only, and should not be used for income tax returns or
other federal income tax related purposes until confirmed by the
IRS later this year.
Some items not indexed. Some items in the Code are not
indexed for inflation and stay the same, while others rise by
dollar amounts already written into the tax law to ensure
Congressional oversight. The exemption amounts for the
alternative minimum tax, for instance, are not indexed, which
means that each year Congress must either increase the amounts
by statute or expose additional households to the alternative
tax.
By contrast, the adjusted gross income limits on the ability
to make full contributions to Roth IRAs have been established by
law at the $95,000 level for singles and $150,000 for joint
filers since 1998. Now they have been made inflation-sensitive
through 2006 legislation. For 2007, the AGI phase-out levels
rise to $99,000 and $156,000, respectively.
Standard deduction, personal exemption also rise. The
standard deduction and personal exemption amounts are also
subject to indexing and these are projected to increase for
2007. These increases can produce lower taxes by reducing the
taxpayer's taxable income.
Single taxpayers and married taxpayers filing separately
could see a $200 increase over 2006 in their standard deduction,
to $5,350, while the standard deduction for joint filers will
increase by $400 to $10,700. Heads of households will see an
increase in their standard deduction of $300, to $7,850.
The additional standard deduction for those age 65 or older
or who are blind, which did not rise in 2006 from the year
before, will take a $50 jump in 2007 to $1,050 for married
individuals and surviving spouses, and $1,300 for single filers.
The personal exemption amount will go up in 2007 by $100 to
$3,400.
These inflation adjustments can add up over time. For
example, since the 1987 tax year, the standard
deduction for joint filers has increased more than
two-and-a-half times, from $3,780 to the anticipated $10,700
amount for 2007.
Taxpayers can, however, lose a good portion of the value of
personal exemptions and itemized deductions when their incomes
rise above certain levels. Those "phase-out" levels
are also adjusted for inflation. For 2007, married couples
filing jointly will begin to lose some of the value of any
itemized deductions when their adjusted gross income exceeds
$156,400. Likewise, they will begin to lose some of the value of
their personal exemptions when their adjusted gross income
exceeds $234,600.
In 2006 and 2007, the reduction in personal exemptions and
itemized deductions is scheduled to be only two-thirds of what
it was in 2005. That's because "phase outs," first
started under the Revenue Reconciliation Act of 1990, are
themselves now scheduled to be phased out by one-third in 2006
and 2007, two-thirds in 2008 and 2009 and completely repealed
for 2010.
"Kiddie" deduction, Gift tax exemption. In general,
inflation adjustments are rounded to the next-lower multiple of
$50, so if the adjustment produces an increase of less than $50,
no increase is made. The "kiddie" standard deduction,
used on the returns of children who are claimed as dependents on
their parents' returns increased in 2001, from $700 to $750, and
jumped next to $800 for 2004. For 2006, it increased to $850,
where it will remain for 2007.
The tax code only allows the gift tax exemption to rise when
the inflation adjustment would produce an increase of $1,000 or
more. The last increase occurred at the beginning of 2006, when
the exemption increased to its current $12,000. This year's
inflation figures aren't enough to push it over the next
threshold, so it will stay at $12,000 for 2007.
October 2006 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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