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!)
TurboTax® Online Federal Free Edition lets you file federal taxes online , but 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.)
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.
Source: obliviousinvestor.com