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Inflation change, higher taxes?

By Kay Bell ·
Tuesday, November 8, 2011
Posted: 4 pm ET

Inflation has been low for the last few years. If you're a buyer, that's good because prices have been low.

But if you depend on Social Security benefits, that's not been too good because those recipients haven't seen a cost-of-living bump in their monthly checks for two years.

That will change in 2012. But another change that's looking more likely could hurt not only older folks who rely on the government payments, but all taxpayers.

The potential problems come from the Chained Consumer Price Index, or chained index. The possibility that the federal government will switch to this inflation measurement has gotten a lot of attention.

My Bankrate colleague Jennie Phipps has discussed how the chained index will produce lower cost-of-living increases for Social Security benefits. In fact, she cites data showing that if Uncle Sam had adopted the chained index 10 years ago, Social Security benefits would be about 3.6 percent lower than they are now.

But a change from the current Consumer Price Index for All Urban Consumers to the chained rating also could hurt much younger individuals, too.

Some estimates are that taxes could go up by $60 billion over the next decade because the annual adjustments to income tax brackets would be smaller.

Typically, when the IRS makes inflation adjustments each fall, income tax brackets get a bump, meaning you might be able to earn a bit more money but stay in the same tax bracket. Again, because of low inflation, the income ranges in the six tax brackets -- starting at 10 percent and going to 35 percent -- have been very similar for the last several years.

For 2012, however, there's a bit more money in the brackets.

As a single taxpayer you could make up to $34,500 in 2011 and still be in the 15 percent tax bracket. In 2012, you'll be able to earn up to $35,350 and stay in that marginal tax bracket.

The top tax bracket of 35 percent applies to a single filer in 2011 making $379,151 or more. For 2012, that top rate doesn't kick in until the single taxpayer makes $388,351 or more.

But if the chained index is used, the inflation changes will be smaller, meaning the tax brackets won't expand as much, so a relatively small bump in income could push you into a higher tax bracket.

Although lots of groups representing senior citizens and lower-income workers are urging Congress to stick with the current cost-of-living system, it's looking more and more like the chained index is in our future.

The Joint Select Committee on Deficit Reduction that has until Nov. 23 to come up with a way to cut the federal debt by at least $1.2 trillion over the next decade is said to be in general agreement about changing the inflation index method.

If you don't want that change, you need to let the supercommittee members know, and soon.

Finally, a quick note for you folks already planning your 2012 taxes: Quit being so obsessive! Honestly, though, stay tuned. Bankrate will soon be bringing you all the 2012 tax figures affected by inflation.

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November 09, 2011 at 4:10 pm

I think the index to be used for adjusting Social Security payments and income tax brackets should be Congressional Salary Increases.

November 09, 2011 at 12:34 pm

Holy one-sentence-paragraphs, batman!