Inflation Adjustments Mean Bigger Deductions and Exemptions
The IRS adjusts the fixed tax deductions and exemptions each year for inflation. For the 2010 tax year, this means they’ve increased.
The fact the IRS has increased the deductions and exemptions for inflation for the 2010 year is very interesting. How so? It creates a unique dichotomy compared to what we see coming out of the Federal Reserve Bank, the real fiscal government of our country. The “Fed” has been pumping money into the economy because it believes we are facing deflation, not inflation. This would seem to put it at odds with the IRS and no explanation seems to be forthcoming.
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So, what are the new figures? Well, let’s start with the standard deductions. They’ve all increased slightly for the 2010 tax year. The new standard deduction for singles is $5,800, up $100 from the previous years. The new standard deduction for married couples is $11,600, up $200 from the previous year. These are the deductions taken if you do not itemize on Schedule A.
Then we have the tax exemptions. Both the personal and dependant exemptions are now set at $3,700. This is an increase of $50 over the previous year. It isn’t a lot, but we all need to save every penny we can these days.
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Then there are tax brackets. They didn’t change much in 2010. The only one of real note is the bracket cut off between the 15 percent and 25 percent tax bracket for married couples. It moved up $1,000 from $68,000 to $69,000. Put another way, a couple reporting $67,600 in total income will pay tax at a rate of 15 percent while a couple reporting $70,000 will pay 25 percent.
The tax code is forever changing and, truth be told, the tax deal reached by the politicians in Congress and the White House at the end of 2010 are still filtering through the system. The IRS has even had to issue a warning not to file certain forms until the middle of February because it is still changing them to reflect the new changes. In short, keep an eye out for further changes being announced as the new law is digested.