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1 Mark Robyn & Gerald Prante, Inflation Adjustment of Tax Brackets Almost Zero for Next Year 1 (2009)

handle is hein.taxfoundation/ffbiixz0001 and id is 1 raw text is: FOUNDATION September 2009 No. 188 FISCAL FACT Inflation Adjustment of Tax Brackets Almost Zero for Next Year by Mark Robyn and Gerald Prante Introduction Today, the Bureau of Labor Statistics (BLS) released its August estimate of the Consumer Price Index (CPI). That August figure is the final statistic used by the IRS in calculating important tax parameters for tax year 2010. Even though these tax returns won't be filed until spring 2011, this information is necessary because employers will use these parameters to estimate withholding in 2010. The numbers released today indicate that this year will mark the smallest inflation adjustment on record (since the IRS began adjusting tax parameters for inflation on an annual basis in the mid- 1980s). While last year saw some of the largest year-over-year increases in most inflation-adjusted tax parameters (4.26%), year-over-year inflation for the purposes of this year's adjustment was less than 0.2 percent (see Table 1 below). How the IRS Calculates Inflation Adjustment The IRS uses the average CPI-U monthly value from the previous 12 months (September through August) and compares it to a base year CPI-U average for each tax variable. Here's a simple example: For the personal exemption (base year of 1988), the initial personal exemption value was $2,000 in a year with a 12-month CPI-U average of 116.61666 (period of Sept. 1987 through Aug. 1988). Given this morning's BLS release, the average CPI-U value for the 12-month period of Sept. 2008 through Aug. 2009) will be 214.0023. Therefore, the ratio of the 2009 CPI-U average to the 1988 CPI-U average equals 1.83509, and we multiply that ratio by $2,000 (the initial personal exemption

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