Note: This article covers tax brackets for 2012. See here for the 2011 tax brackets, which will apply to the returns due 4/17/2012.
The Bureau of Labor Statistics recently released the CPI-U figure for August of this year, thereby providing the last piece of information needed for the calculation of the 2012 tax brackets.
The reason the August inflation figure is the last piece needed to calculate next year’s tax brackets is that, according to the internal revenue code, for purposes of calculating tax brackets:
“The cost-of-living adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year, exceeds the CPI for the calendar year 1992. [...] The CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year.”
So, in short, to calculate a given year’s tax brackets, you take the 1992 tax brackets, adjust the tax rates based on the Jobs and Growth Tax Relief Reconciliation Act of 2003, then adjust the applicable income levels upward in keeping with inflation.
If the upper income limit for any tax bracket determined in the above manner is not a multiple of $50, it’s rounded down to the nearest multiple of $50 — with the exception of married filing separately tax brackets, for which you round down to the nearest multiple of $25.
As it turns out, the September 2010 – August 2011 average CPI-U was 2.43% higher than the September 2009 – August 2010 average CPI-U. And that leaves us with the following tax brackets. (Thanks to the Tax Foundation for doing the math, and to their analyst Nick Kasprak for explaining it to me!)
A quick reminder before we get to the tax bracket tables: Being in a given tax bracket does not mean that all of your income will be taxed at that rate. Rather, only the portion of your income that is in that bracket will taxed at that rate. (See this article for a more complete explanation.)
Single 2012 Projected Tax Brackets
| Taxable Income |
Marginal Tax Rate: |
| $0-$8,700 | 10% |
| $8,701-$35,350 | 15% |
| $35,351-$85,650 | 25% |
| $85,651-$178,650 | 28% |
| $178,651-$388,350 | 33% |
| $388,351+ | 35% |
Married Filing Jointly 2012 Projected Tax Brackets
| Taxable Income |
Marginal Tax Rate: |
| $0-$17,400 | 10% |
| $17,401-$70,700 | 15% |
| $70,701-$142,700 | 25% |
| $142,701-$217,450 | 28% |
| $217,451-$388,350 | 33% |
| $388,351+ | 35% |
Head of Household 2012 Projected Tax Brackets
| Taxable Income |
Marginal Tax Rate: |
| $0-$12,400 | 10% |
| $12,401-$47,350 | 15% |
| $47,351-$122,300 | 25% |
| $122,301-$198,050 | 28% |
| $198,051-$388,350 | 33% |
| $388,351+ | 35% |
Married Filing Separately 2012 Projected Tax Brackets
| Taxable Income |
Marginal Tax Rate: |
| $0-$8,700 | 10% |
| $8,701-$35,350 | 15% |
| $35,351-$71,350 | 25% |
| $71,351-$108,725 | 28% |
| $108,726-$194,175 | 33% |
| $194,176+ | 35% |
Projected 2012 Standard Deduction and Exemption
The standard deduction and personal exemptions are calculated similarly (that is, using annual inflation figures from September-August) but with different base years (1987 for the standard deduction and 1988 for exemptions).
For 2012 the projected personal exemption is $3,800, and the projected standard deductions are:
- $5,950 for single taxpayers and married taxpayers filing separately,
- $11,900 for married taxpayers filing jointly, and
- $8,700 for taxpayers filing as head of household.
The additional standard deduction for taxpayers who are blind or over age 65 is projected to remain unchanged at $1,450 for single taxpayers and $1,150 for married taxpayers.
Important caveat: Everything above is subject to change. Should any new tax legislation be passed before the end of this year (or passed in 2012 and made effective for that year), this information could turn out to be entirely incorrect.
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Mike, can we use the CPI data to determine whether there will be an adjustment to the maximum IRA or 401(k) contributions?
Matthew:
I’m only learning all this for the first time. So here’s what I’m finding, but it’s possible I’m overlooking something.
Per Section 219 (b)(5)(D), I believe IRA contributions do have such an adjustment, but you round down to the nearest $500 increment, which makes increases less common. (The limit for Roth contributions appears to reference the same section, so it looks like the same rule applies.)
The income limits for traditional and Roth contributions (mentioned here and here) have such inflation adjustments, and they round to the nearest $1,000.
So far I’m struggling to find any such thing about 401(k) contribution limits, but that doesn’t mean it’s not there.
Edit: I think I found it. Section 402 (g)(1)(A-B) and (g)(4). It looks like a different calendar is used for this purpose though (with years beginning on July 1 rather than September 1), with rounding down to the nearest $500.
I’m always happy to be the proximate cause of a learning experience. So it sounds like the 401(k) limit has a much lower threshold for change than the IRA limit, right?
Hmm, I’m not sure I’m looking at the right month of CPI data, but in any, looks like no 401(k) adjustment either. Oh well.
“I’m not sure I’m looking at the right month of CPI data.”
Are you looking at the 3.8% figure from that release? If so, that’s what Nick from the Tax Foundation was kind enough to explain to me. I couldn’t see why they were using 2.43% inflation instead of 3.8%.
The 3.8% is August 2011 compared to August 2010. But the number you need to use is the average CPI-U from Sept 2010 — August 2011, compared to the average of September 2009 — August 2010. And that’s what the 2.43% figure is–you just can’t calculate that until you have the last month of data.
With little good news in terms of tax reform, we can rejoice a little with the higher tax brackets – which are equivalent to a tax cut if your pay check remains unchanged (so there Tea party!). BTW – Excellent job explaining the CPI-U impact in an easy to understand way.
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