WSJ Tax article
Why Inflation Means Relief For Taxpayers Adjustments to Exemptions, Brackets for 2009 Will Benefit High-Income Filers the Most
SEPTEMBER 17, 2008
By TOM HERMAN
No matter who wins the White House, most taxpayers can look forward to some relief next year.
Based on inflation data released Tuesday by the Labor Department, the personal exemption amount, standard deduction, federal income-tax brackets and many other tax-related numbers will increase in 2009, thanks to annual adjustments required by law. Once again, high-income taxpayers generally will benefit the most.
For example, several so-called stealth taxes that ensnare millions of upper-income Americans each year will start at higher income levels for 2009, compared with 2008. Among these are limits on itemized deductions and personal exemption amounts. They’re known as stealth taxes because they raise your taxes without changing the tax rates and thus can be difficult to detect by voters.
On Sept. 17, CCH plans to post a summary of the inflation adjustments on its Web site: http://www.cch.com
In one of the biggest changes, the annual gift-tax exclusion is likely to increase by $1,000 to $13,000, says James C. Young, a professor of accountancy at Northern Illinois University. Starting in 2009, you will be able to give away as much as $13,000 to anyone you wish — and to as many people as you wish — without any tax considerations. Many wealthy people take advantage of this provision each year as part of their estate-planning strategy.
(You can give away even more than the exclusion amount by paying someone else’s tuition or medical bills. However, you need to make those payments directly to the medical or educational provider.)
All the new inflation-adjusted numbers, which affect returns for 2009 to be filed in 2010, are unofficial. They were crunched by three private-sector tax experts: George Jones, senior federal tax analyst at CCH, a Wolters Kluwer business; William Massey, senior tax analyst for the tax & accounting business of Thomson Reuters; and Prof. Young. This column publishes highlights of their calculations each year since those estimates have been highly reliable over many years.
How much of a saving will taxpayers enjoy because of the inflation adjustments? The answer can vary widely, depending upon the details of each person’s tax situation. A married couple filing jointly with total taxable income of $100,000 will pay $312.50 less in federal income taxes for 2009 than they will on the same income for 2008, says Mr. Jones of CCH. Official numbers from the Internal Revenue Service typically aren’t released until late each year. If the government subsequently revises the inflation data, some projections could change. For more details on the inflation adjustments, visit CCH’s Web site (www.cch.com).
These estimates may help early birds refine their tax-planning and budget strategies. But tax planning can be unusually difficult these days, since nobody knows what tax-law changes may lie ahead next year after a new president moves into the Oval Office. It isn’t even clear yet what Congress will do about several key issues affecting taxes for 2008.
The most likely outcome is that Congress will approve a stopgap measure, known as an “AMT patch,” designed to keep the number of people affected by the alternative minimum tax at about the same level as in 2007. Prospects improved Tuesday when Senate leaders said they had agreed on legislation that would include higher AMT income exemption amounts.
The AMT has many rules that differ from the regular system. For example, state and local taxes aren’t deductible under the AMT. That’s why among those most likely to be affected by the AMT are taxpayers who live in high-tax areas, such as New York City, New Jersey and California, and who make between about $100,000 and $500,000. For more details on the inner workings of the AMT, visit the Web site of the Tax Policy Center (http://www.taxpolicycenter.org), a joint venture of the Urban Institute and Brookings Institution.
The AMT was created decades ago in an effort to make sure high-income Americans paid at least some federal income tax. Over the years, the AMT’s reach has expanded rapidly. If Congress does nothing to change current law, about 26 million Americans will owe more in tax for 2008 because of the AMT, up from around four million for 2007.
Congress also hasn’t taken action yet to revive several popular tax breaks that expired at the end of last year. However, the Senate agreement announced Tuesday includes extensions of expired provisions such as the option to deduct state and local sales taxes, instead of state and local income taxes, when itemizing deductions.
In most cases, ordinary taxable income of more than $372,950 for 2009 will be taxed at the top federal income-tax rate of 35%. That’s up from $357,700 for 2008. (For more details, see the accompanying table.)
The basic standard deduction is expected to rise to $11,400 for married couples filing jointly. That’s a $500 increase from $10,900 in 2008 — and well above the $200 increase for 2008, compared with 2007. For singles and those who file separately, the basic standard deduction amount will rise to $5,700 from $5,450 in 2008. These are known as “basic” standard deductions since there are additional amounts for the elderly and blind.
The personal exemption amount is expected to increase to $3,650 from $3,500 in 2008.
Two stealth taxes will start at higher income levels. For example, consider the itemized-deduction limit. In essence, you lose part of certain itemized deductions once your income exceeds a certain level, which is adjusted each year for inflation. For 2009, most taxpayers will begin to lose some of the value of certain itemized deductions once their adjusted gross income exceeds $166,800. That’s up from $159,950 for 2008. Calculating the reduction in both itemized deductions and personal exemptions can be complex. See the IRS instructions for more details or use tax-preparation software.
Mr. Jones of CCH notes that other tax-law provisions aren’t adjusted for inflation and stay the same. Among them is the annual limit on net capital losses, which many investors this week may wish were much larger. Here’s how it works: Investors typically can offset capital gains with capital losses on a dollar-for-dollar basis. If your losses exceed your gains, you typically can deduct as much as $3,000 of those net capital losses each year ($1,500 if married and filing separately). Additional amounts are carried over into future years. Those limits haven’t budged for many years.
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More tipsters, lured by big rewards, contact the IRS.
A law enacted in 2006 offers sharply higher rewards to informants in cases involving large amounts of tax cheating and other violations. That law has helped generate a torrent of tips, according to a report issued Tuesday by the IRS Oversight Board.
In the first eight months of this year, the IRS “has been contacted by more than 800 whistleblowers with cases that allege $2 million or more in unpaid taxes,” the report said.