Tax Rate Projections for 2007

The indexing of many features of the tax code will bring some relief to taxpayers next year, according to estimated income ranges for each 2007 tax bracket calculated by FFG, a Wolters Kluwer business and a leading provider of tax, audit and accounting information, software and services.

Unlike many changes to the tax laws which are effective for only limited periods of time, indexing has become a settled part of the tax code, according to George Jones, JD, FFG senior tax analyst.

“While some tax cuts in recent years are only temporary, and are scheduled to be followed by increases down the line, indexing works year after year, and it’s likely to be a part of the tax laws for the foreseeable future irrespective of whether Congress plans to tinker more with the tax rates themselves,” Jones said.

Indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets--in the 15-percent rather than the 25-percent bracket, for example.

“This also means that across-the-board inflation adjustments to the brackets provide more relief for those in the upper brackets, since they share in the reduction within each bracket, not just their own marginal tax bracket,” Jones noted.

Two examples show the modest tax savings generated by indexing:

• Because of inflation adjustments, a married couple filing jointly with a total taxable income of $100,000 will pay $267.50 less in income taxes in 2007 than they will on the same income for 2006.
• A single filer with taxable income of $50,000 will save $131.25 next year due to the adjustments.

Inflation Adjustments

Since the late 1980s, the U.S. tax code has required that federal income tax brackets be adjusted for inflation annually, and inflation adjustments have been inserted into the Internal Revenue Code in recent years with increasing frequency. For example, the Code now requires over 50 other inflation-driven computations to determine deduction, exemption and exclusion amounts in addition to the 40 separate computations needed to inflation-adjust the tax bracket tables each year. Tax legislation in 2006 continued to add to the number of required inflation adjustments.

The adjustments are based on Consumer Price Index figures for September through August immediately prior to the adjusted year. FFG’s projections are based on the relevant inflation data released September 15, 2006, by the U.S. Department of Labor.