Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts

Friday, September 17, 2010

Taxpayers Will See Relief By Way of Inflation-Adjusted Indexing, But Total Tax Impact Remains Unclear, CCH Says

/PRNewswire/ -- Taxpayers stuck in the current economic downturn will get at least some relief in 2011 thanks to the mandatory upward inflation-adjustments called for under the tax code, according to CCH, which today released estimated income ranges for each 2011 tax bracket. CCH also projects the growing number of other inflation-sensitive tax figures, such as the personal exemption and the standard deduction.

"Indexing for inflation has become an established part of our tax system, and it's likely to be a part of the tax law for the foreseeable future even as Congress debates changes to the tax rates themselves," according to George Jones, JD, CCH Senior Federal Tax Analyst.

Projections this year, however, are clouded by the uncertainty of expiring provisions in the tax code. If Congress allows the tax cuts within Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) to expire as called for at the end of 2010, many taxpayers could lose more ground than they will otherwise gain.

When there is inflation, indexing of brackets lowers tax bills by including more of people's incomes in lower brackets - in the existing 15-percent rather than the existing 25-percent bracket, for example. The formula used in indexing showed a relatively small amount of inflation this year, just under 1.5 percent. However, this is far greater in comparison to the 0.18 percent inflation factor used to set 2010 tax amounts. Therefore, while 2010 inflation-adjusted amounts in many cases stayed flat as a result, most 2011 figures will move higher.

For 2011, however, the big question is not whether the brackets will continue to increase because of inflation - they will. Rather, it is what tax rates will be applied against those brackets. The current 10-, 15-, 25-, 33- and 35-percent rates are now scheduled to sunset to the pre-EGTRRA rate structure of 15, 28, 31, 36 and 39.6 percent. In addition, there are two possible alternative scenarios being debated by lawmakers:

-- Extend the current tax bracket structure in its entirety; or
-- As the proposal from President Obama calls for, keep the current rate
structure except revive the 36- and 39.6-percent rates, starting at a
higher income bracket level; he would also amend the standard
deduction so that it does not revive the marriage penalty that had
been in place prior to EGTRRA.



In other words, Jones noted, it gets complicated quickly without knowing yet which approach Congress will take.

"While we were looking at the very real possibility of deflation in the tax adjustment required under the tax code last year, this year we are 'back to normal' in the sense that the expected upward adjustment in tax benefits from 2010-2011 are taking place," said Jones. "The only wildcard remains how Congress will deal with the sunsetting provisions. We may not know that until a possible lame-duck session of Congress this December."

The examples below show the modest tax savings generated by indexing and how they would be reversed if the EGTRRA tax cuts were to expire wholesale:

-- Because of inflation adjustments, a married couple filing jointly with
a total taxable income of $100,000 should pay $112.50 less in income
taxes in 2011 than they will on the same income for 2010 (compared to
only a $12.50 savings between 2009 and 2010). That savings remains
whether the EGTRRA tax cuts are fully extended or President Obama's
proposal is adopted. However, if the rates and marriage penalty relief
sunset entirely, the couple will end up paying $3,143 more in taxes in
2011.
-- A single filer with taxable income of $50,000 should owe $56 less next
year due to the adjustments (again, compared to only a $6.25 savings
between 2009 and 2010). However, once again, even with savings from
the inflation adjustments, a single filer will owe $834 more in 2011
than in 2010 on the same $50,000 amount if complete sunset of the
rates takes place.
-- For taxpayers with more than $379,150 in taxable income in both 2010
and 2011, the maximum savings from indexing the tax brackets for 2011
will be more dramatic. However, so will the additional tax that would
be owed under either a complete sunset of the EGTRRA tax cuts or
adoption of the Obama proposal, which would continue to give
high-income taxpayers the incremental benefit of the 10-percent rate
bracket as well as allow them an expanded 28-percent bracket.
Inflation-generated savings if all rates were extended would amount to
$330 for a single filer with $400,000 taxable income, for example.
However, that same taxpayer would pay an additional $11,394 under a
full sunset of the rates, and $5,080 more under the Obama proposal
above 2010 amounts.


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. In fact, the health care reform legislation passed earlier this year adds an even greater number of inflation-adjustments to the tax code, although health-related indexing won't start until 2013.

Most adjustments are based on Consumer Price Index figures for September through August immediately prior to the adjusted year. However, some inflation-adjusted figures are computed earlier and some later. For example, amounts such as the 2011 vehicle depreciation limits won't be available until 2011 (the $3,060 regular first-year amount for 2010 was not released until February 2010), while the standard business mileage rate (that is currently set at 50 cents for 2010) isn't expected to be computed for 2011 and released until December 2010.

CCH's projections for other indexed amounts are based on the relevant inflation data released September 17, 2010, by the U.S. Department of Labor.

The IRS usually releases official numbers by December each year. CCH tax bracket projections are provided for illustrative purposes only, and should not be used for income tax returns or other federal income tax related purposes until confirmed by the IRS later this year.

Some Items Not Indexed

Jones observed that some items in the Code are not indexed for inflation and stay the same, while others rise by dollar amounts already written into the tax law.

"The exemption amounts for the alternative minimum tax are not indexed, which means that each year Congress must either increase the amounts by statute or expose additional households to the AMT," Jones said.

For 2009, Congress set the AMT exemption amounts at $46,700 for single individuals and $70,950 for married couples filing jointly. Congress has relied on one- or two-year AMT patches to account for inflation from the initially set amounts of $33,750 and $45,000, respectively. However, there is no technical requirement under the tax code to increase those amounts for inflation. No amounts have been set yet for 2010, no less for 2011. While they are scheduled to revert to the default amounts of $33,750/$45,000 without action, the Obama administration tax proposals contemplate further increases.

Standard Deduction, Personal Exemption Rise

The standard deduction and personal exemption amounts are also subject to indexing; however, because of "rounding down," some years show no change at all. After very little movement in the 2010 amounts, 2011 will see a jump in all standard deduction levels. However, a wrinkle occurs if the EGTRRA sunset provisions move forward. In which case, the marriage penalty relief that has been built into the standard deduction for married couples filing jointly will be eliminated. Rather than double the standard deduction for unmarried single filers, the 2011 standard deduction for joint filers would drop by $1,750 to $9,650, even taking the past year's inflation into account.

Assuming that Congress will not let any of the standard deduction amounts sunset, however, the standard deduction for single taxpayers, heads of households and marrieds filing separately will all increase by $100 in 2011. The standard deduction for joint filers would rise by $200, to $11,600. Any increase in the standard deduction, of course, can produce lower taxes by decreasing the taxpayer's taxable income.

The additional standard deduction for those age 65 or older or who are blind will rise by $50 to $1,150 in 2011 for married individuals and surviving spouses, and by $50 to $1,450 for single filers. The personal exemption amount also gets bumped up by inflation by $50, to $3,700 in 2011.

Taxpayers have had to lose a good portion of the value of personal exemptions and itemized deductions when their incomes rise above certain levels, which have also been adjusted for inflation. For 2010, these "phaseouts" disappeared from the tax code, but only temporarily if Congress does not act. As part of the EGTRRA sunset, they are scheduled to return in 2011, with a personal exemption phase-out range starting at $254,350 for joint filers and $169,550 for single filers and a phase-out range for itemized deductions starting at $169,550 for all filers except married couples filing separately whose phase-out range for itemized deductions starts at $84,775.

"The removal of limitations on itemized deductions and personal exemptions, rather than indexing of brackets, will provide major tax savings in 2010 for many well-off taxpayers. The return of these limitations in 2011 would pose an equally important change in the reverse direction," Jones observed.

For a complete look at how income ranges for each tax bracket are projected to shift next, see the CCH chart below.

"Kiddie" Deduction, Gift Tax Exemption

In general, inflation adjustments are rounded to the next-lower multiple of $50, so if the adjustment produces an increase of less than $50, no increase is made. The "kiddie" deduction, used on the returns of children claimed as dependents on their parents' returns, increased only five times in the years 2001 through 2010. It last rose for the 2009 tax year. For 2011 the deduction will remain at that $950 level.

The Code only allows the gift tax exemption to rise when the inflation adjustment would produce an increase of $1,000 or more. The last increase occurred in 2009, when it rose to $13,000. It remains there for 2011.

CCH 2011 TAX PROJECTIONS*




  Married Filing Jointly (& Surviving Spouse)

    Tax
   Rate   2011 Taxable Income
                 Complete              Full
                  Sunset            Extension
     10%  n/a                         $0-$17,000
     15%           $0-$57,650    $17,000-$69,000
     25%  n/a                    $69,000-139,350
     28%     $57,650-$139,350  $139,350-$212,300
     31%    $139,350-$212,300  n/a
     33%  n/a                  $212,300-$379,150
     35%  n/a                           $379,150+
     36%    $212,300-$379,150  n/a
   39.6%             $379,150+ n/a





    Tax                                            2010 Taxable
   Rate            2011 Taxable Income                 Income
                          Obama
                         Proposal
     10%                            $0-$17,000         $0-$16,750
     15%                            $0-$69,000    $16,750-$68,000
     25%                      $69,000-$139,350   $68,000-$137,300
     28%                     $139,350-$237,300  $137,300-$209,250
     31%  n/a                                   n/a
     33%  n/a                                   $209,250-$373,650
     35%  n/a                                            $373,650+
     36%                     $237,300-$379,150  n/a
   39.6%                              $379,150+ n/a





  Unmarried Individuals (other than surviving spouses and heads of
  households)

  Tax Rate  2011 Taxable Income
              Complete Sunset     Full Extension
      10%   n/a                          $0-$8,500
      15%            $0-$34,500     $8,500-$34,500
      25%   n/a                    $34,500-$83,600
      28%       $34,500-$83,600   $83,600-$174,400
      31%      $83,600-$174,400  n/a
      33%   n/a                  $174,400-$379,150
      35%   n/a                           $379,150+
      36%     $174,400-$379,150  n/a
     39.6%             $379,150+ n/a





                                                     2010 Taxable
  Tax Rate     2011 Taxable Income                      Income
                 Obama Proposal
      10%                              $0-$8,500          $0-$8,375
      15%                         $8,500-$34,500     $8,375-$34,000
      25%                        $34,500-$83,600    $34,000-$82,400
      28%                       $83,600-$195,550   $82,400-$171,850
      31%  n/a                                    n/a
      33%  n/a                                    $171,850-$373,650
      35%  n/a                                             $373,650+
      36%                      $195,550-$379,150  n/a
     39.6%                              $379,150+ n/a





  Head of Household

  Tax Rate  2011 Taxable Income
              Complete Sunset     Full Extension
      10%   n/a                         $0-$12,150
      15%            $0-$46,250    $12,150-$46,250
      25%   n/a                   $46,250-$119,400
      28%      $46,250-$119,400  $119,400-$193,350
      31%     $119,400-$193,350  n/a
      33%   n/a                  $193,350-$379,150
      35%   n/a                           $379,150+
      36%     $193,350-$379,150  n/a
     39.6%             $379,150+ n/a





                                                     2010 Taxable
  Tax Rate     2011 Taxable Income                      Income
                 Obama Proposal
      10%                             $0-$12,150         $0-$11,950
      15%                        $12,150-$46,250    $11,950-$45,550
      25%                       $46,250-$119,400   $45,550-$117,650
      28%                      $119,400-$216,400  $117,650-$190,550
      31%  n/a                                    n/a
      33%  n/a                                    $190,550-$373,650
      35%  n/a                                             $373,650+
      36%                      $216,400-$379,150  n/a
     39.6%                              $379,150+ n/a





  Married Individuals Filing Separate Returns

  Tax Rate  2011 Taxable Income
              Complete Sunset     Full Extension
      10%   n/a                          $0-$8,500
      15%            $0-$28,825     $8,500-$34,500
      25%   n/a                    $34,500-$69,675
      28%       $28,825-$69,675   $69,675-$106,150
      31%      $69,675-$106,150  n/a
      33%   n/a                  $106,150-$189,575
      35%   n/a                           $189,575+
      36%     $106,150-$189,575  n/a
     39.6%             $189,575+ n/a





                                                     2010 Taxable
  Tax Rate     2011 Taxable Income                      Income
                 Obama Proposal
      10%                              $0-$8,500          $0-$8,375
      15%                         $8,500-$34,500     $8,375-$34,000
      25%                        $34,500-$69,675    $34,000-$68,650
      28%                        $69,675-118,650   $68,650-$104,625
      31%  n/a                                    n/a
      33%  n/a                                    $104,625-$186,825
      35%  n/a                                             $186,825+
      36%                      $118,650-$189,575  n/a
     39.6%                              $189,575+ n/a





  Standard Deduction Amounts

  Filing Status    2011**                        2010   Increase
  Married Filing
   Jointly (&
   Surviving
   Spouse)             $9,650 (with marriage  $11,400   (-$1,750)
                    penalty relief
                    sunset);
                   $11,600 (without marriage
                    penalty relief
                    sunset)                   $11,400        $200
  Married Filing
   Separately          $4,825 (with marriage   $5,700     (-$875)
                    penalty relief
                    sunset)
                    $5,800 (without marriage
                    penalty relief
                    sunset                     $5,700        $100
  Single                              $5,800   $5,700        $100
  Head of
   Household                          $8,500   $8,400        $100

  **A marriage penalty exists when the combined tax liability of a
  couple filing a joint return is greater than the sum of the tax
  liabilities each would have if they were unmarried. If the EGTRRA
  sunset takes effect, it will trigger a marriage penalty with the
  basic standard deduction for married individuals filing joint
  returns dropping considerably.





  Standard Deduction for Dependents ("Kiddie" Standard Deduction)

        2011                   2010     Increase
             $950              $950              $0





  Income Level at Which 3-Percent Itemized Deduction Limitation Takes
  Effect (Adjusted Gross Income)

                      2011(with
  Filing Status        sunset)    2010***        2009
  Married Filing
   Jointly             $169,550  n/a         $166,800
  (& Surviving
   Spouse)
  Married Filing
   Separately           $84,775  n/a          $83,400
  Single               $169,550  n/a         $166,800
  Head of Household    $169,550  n/a         $166,800

  *** For 2010, these limitations disappeared from the tax code; if the
  limitation rules under EGTRRA are allowed to sunset, the above rates
  will apply for 2011.





  Personal Exemption Amounts

   2011     2010  Increase
  $3,700  $3,650       $50





  Threshold for Personal Exemption Phaseout

                    2011(with
  Filing Status       sunset)    2010****      2009
  Married Filing
   Jointly            $254,350  n/a        $250,200
  (& Surviving
   Spouse)
  Married Filing
   Separately         $127,175  n/a        $125,100
  Single              $169,550  n/a        $166,800
  Head of
   Household          $211,950  n/a        $208,500

  **** For 2010, these "phaseouts" disappeared from the tax code; if
  the phaseout rules under EGTRRA are allowed to sunset, the above
  phaseout levels will apply for 2011.





  Gift Tax Exemption

    2011      2010   Increase
  $13,000  $13,000         $0





  Income Limit for Full Roth IRA Contribution

  Filing Status      2011      2010   Increase
  Married
   Filing
   Jointly       $169,000  $167,000     $2,000
  Single         $107,000  $105,000     $2,000

  Income Limit for Full Roth IRA Contribution
  Filing Status               2011      2010  Increase
  Married Filing Jointly  $169,000  $167,000    $2,000
  Single                  $107,000  $105,000    $2,000


* These numbers are projected for the 2011 tax year and have not been confirmed by the Internal Revenue Service.
CCH, a Wolters Kluwer business (CCHGroup.com) is the leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913.

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Wednesday, June 3, 2009

Volcker Says Full Economic Recovery is Years Away

/PRNewswire / -- Speaking yesterday to 500 Brooklyn Law School graduates at their commencement, Paul A. Volcker, Chair of the President's Economic Recovery Advisory Board, said a full economic recovery is years away, and the U.S. must eventually cut back on borrowing from abroad. Mr. Volcker is widely credited with taming runaway double-digit inflation in the 1980s when he served as Chairman of the Federal Reserve Board.

A transcript of the speech is available at the Brooklyn Law School Web site, www.brooklaw.edu

Mr. Volcker said the nation has long been spending beyond its means. The U.S. faces "an unimaginable budget deficit as far as one can see," he said. The recession, which began in December 2007, "is bound to be the longest recession since World War II and could turn out to be the deepest as well."

He said that new regulations are necessary to prevent another crisis. "In my view, as joined by many others, sweeping reforms are truly necessary, in banking, in markets, and in our regulatory institutions," Mr. Volcker said.

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Thursday, April 16, 2009

Investing for Hyperinflation

/PRNewswire/ -- The National Inflation Association today released the following statement to its http://inflation.us/ members:

"Today, hyperinflation is the last thing on most Americans' minds because they can't see it yet and they don't know it's coming.

Imagine taking a bottle and putting into it a bit of bacteria that you can only see under a microscope. Now let's say this bacteria doubled in size every minute and after 55 minutes, you still don't see any bacteria. But then, five minutes later or one hour since the bacteria started doubling, the entire bottle is full of bacteria.

Massive monetary inflation is already taking place today. Nobody can see it yet because temporary forces have pushed consumer good and commodity prices down, which has tricked economists into believing deflation is the real problem.

However, almost every action President Obama, Congress, and the Federal Reserve take every single day is sowing the seeds for hyperinflation. You need to invest today as if hyperinflation is already here, because once it arrives it will be too late.

People often ask us, how to invest in gold and how much gold is too much to have. There is no such thing as having too much gold. Although you should never put all your eggs in one basket, it is much better to have all of your money in gold than to have it all in U.S. dollars. The U.S. dollar will inevitably return to its true value, which is zero. Gold will always retain its value; unless huge new gold discoveries are made, which is very unlikely.

Many Americans are afraid to invest heavily into gold because of its volatility. Today's volatility in gold is nothing but noise that should be ignored. Many short-term traders buy gold for the wrong reasons. They buy it as a safe haven from stocks, and when stocks rally they sell their gold to buy stocks.

These investors are obviously not aware of the Dow/Gold ratio, which we went over in our last article. Clearly, the Dow/Gold ratio is in free-fall and last time it was in free-fall it bottomed at 1. Meaning, 1 oz of Gold was worth the same as the price of the Dow. We are likely headed there again.

There are many ways to invest in gold. Physical ownership, which means you buy gold bullion in the form of bars or coins and store it yourself, is obviously one option. You won't get rich owning physical gold, but you will at least retain your purchasing power while most Americans lose everything. Remember, as gold prices rise, the gold itself is not increasing in value but the U.S. dollar is losing its value.

One of the problems with buying physical gold is the dealers that sell physical gold often charge large premiums. On eBay, 1 oz gold coins are currently selling for around $1,000 per oz, despite gold's current spot price of $875 per oz. Generally, if you buy a larger quantity of gold in the form of a bar, you will pay less of a premium. But, it might not be a good idea to store gold bars on your own and risk them being stolen.

We believe one of the best ways to invest in gold is through exchange traded funds and notes, otherwise known as ETFs and ETNs. On Tuesday we will be releasing an NIA report on ETFs and ETNs, discussing all of the different gold, silver, and agriculture ETF/ETNs we like along with the risks involved in purchasing them. We will also be discussing ETF/ETNs that allow you to short the U.S. dollar and treasuries.

The way to get rich during hyperinflation is to buy the right gold mining stocks. Gold mining has many fixed production costs and just a 100% increase in the price of gold, could mean a 1,000% increase in the profitability of a gold mining company.

When it comes to gold stocks there are top-tier miners, mid-level miners, junior miners and gold exploration companies. So far we have profiled mostly top-tier and mid-level miners, but our most recent profile is a gold exploration company that we believe could become a mid-level to top-tier miner in the future. Gold exploration companies have the greatest upside potential, but also the most risk. What you need to look for are gold exploration companies that have joint ventures with top-tier miners, which is the case with our latest profile."

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Thursday, March 19, 2009

NIA Says Americans Should Prepare for Hyperinflation

/PRNewswire/ -- The National Inflation Association today released the following statement to its http://inflation.us/ members:

"The Federal Reserve's announcement on Wednesday to expand its balance sheet by $1.15 trillion puts our country on a direct path towards hyperinflation.

By spending $300 billion on long-term U.S. Treasuries, $750 billion on worthless mortgage-backed securities, and $100 billion on other federal agency debt; the Federal Reserve will be doing nothing more than printing $1.15 trillion out of thin air, which means Americans are guaranteed to see a sharp decline in the purchasing power of their U.S. Dollars.

Wednesday's news brings total funds allocated by the Federal Reserve and United States Treasury during the financial crisis up to $11.4 trillion and although only $2.8 trillion has so far been spent, we believe the full $11.4 trillion will inevitably be spent.

If the Federal Reserve simply allowed AIG to fail, the free-market would've efficiently reorganized the company in bankruptcy. The $165 million in employee bonus contracts, that Congress has been so eager to express outrage about, would've been wiped out completely. The failure of AIG would not have brought down the U.S. financial system. However, bailing out every financial firm on Wall Street will.

Federal Reserve Chairman Ben Bernanke commented this past weekend on 60 Minutes that our country's biggest risk is we don't have the political will and commitment to solve our current financial problems. We respectfully disagree with Chairman Bernanke and believe our country's biggest risk is hyperinflation, that will come as a result of the Federal Reserve's actions.

Up until now, the United States has been successful at keeping inflation somewhat under control by borrowing the money for much of its spending from China. However, China's Premier of the State Council Wen Jiabao said last week that he is worried about the safety of the U.S. Treasuries they are holding. By China publicly acknowledging their fears, not only is it possible China will stop buying U.S. Treasuries, but they could take advantage of the Federal Reserve buying U.S. Treasuries and use it as an opportunity to sell.

The U.S. Consumer Price Index rose in February by 0.4 percent, which equals an annualized inflation rate of 4.8 percent. We believe inflation would be much higher if it wasn't for all of the temporary factors driving consumer prices down such as the forced liquidations of hedge funds, de-leveraging of banks, going out of business sales of retail stores, etc.

These temporary factors will soon be gone. They are likely to end at the same time as the Federal Reserve begins printing trillions of Dollars and China potentially becomes a net seller of U.S. Treasuries. The perfect storm is ahead for massive inflation to begin in the second half of 2009. Being that our country already has an $11 trillion national debt and $55 trillion in unfunded liabilities for social security, Medicare, and other social programs; hyperinflation during the next decade is becoming less the worst case scenario and more the most likely scenario.

Our country's current financial crisis is a walk in the park compared to what is ahead. Despite rapidly rising unemployment rates, Americans today can still purchase very cheap food, clothing, and gas. We can't take this for granted and must prepare for what is ahead.

If you prepare for the worse, the best will always happen. Americans who begin preparing for hyperinflation now, not only could preserve their purchasing power in the years ahead, but could potentially become wealthy as Americans hoarding U.S. Dollars, bonds and other dollar-denominated assets lose everything. We believe there will soon be a Gold, Silver, and Agriculture boom that will make the dot-com and Real Estate booms look small in comparison."

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