Everyone know the old adage ‘The only things certain in life are death and taxes”. As it turns out, inflation may have to be included in this saying. Inflation decreases the value of money as time goes on, ultimately making the dollar of today worth more than the dollar of the future. It influences how much we spend on everyday items, how much we make, and how much things like houses and cars cost. It even helps dictate what we owe the government come April 15th. In fact, in regards to tax season, inflation can actually help us save a few bucks.
The Rate of Inflation
In the past few years, the rate of inflation has been consistently inconsistent: it has fluctuated among the one, two, or three percentiles (with a few months that presented negative numbers). While inflation isn’t always all that noticeable on a month-to-month basis, its impact is truly felt over a period of several years. For example, according to the Bureau of Labor and Statistics, a $250,000 house purchased in 2008 would be worth approximately $270,000 in present day (if inflation is the only variable taken into consideration).
Inflation and Taxes
Each year, annual inflation leads to a number of tax changes. In 2014, per the Internal Revenue Service, more than 40 tax provisions are scheduled to be adjusted. Some of these adjustments include:
- Tax Rate: The 2014 rate has changed to 39.6 percent for singles who have an income level higher than $406,750 and married couples (filing a joint return) who have an income level higher than $457,600. These numbers are up from $400,000 and $450,000, respectively.
- Deductions: The 2014 standard deduction amount has increased to $6,200 for singles and $12,400 for married couples (filing a joint return). These numbers are up from $6,100 and $12,200, respectively. The 2014 standard deduction amount for heads of the household also increases, up to $9,100 from $8,950.
- Personal Exemptions: The 2014 personal exemption amount rises to $3,950, up from $3,900. However, this phases out at $376,700 (for singles) and $427,550 (for married couples who are filing a joint return).
- Earned Income Credit: The 2014 maximum Earned Income Credit rises to $6,143 for married taxpayers (who are filing jointly and have three or more qualifying children). This is an increase from the 2013 amount of $6,044.
- Estate Exclusions: For people who pass away in 2014, the basic exclusion amount for their estates to descendants rises to $5,340,000. This is an increase from $5,250,000 for the estates of decedents for people who died in 2013.
- Foreign Earned Income: The 2014 foreign earned income increases to $99,200. This is an increase from the 2013 amount of $97,600.
- Alternative Minimum Tax Exemption: The 2014 Alternative Minimum Tax Exemption increases to $52,800 for singles and to $82,100 for married couples (filing jointly). This is an increase from the 2013 amounts of $51,900 and $80,800, respectively.
Provisions that Remain Unchanged
Despite the rate of inflation, some tax provisions remain unchanged. For example, the 2014 annual exclusion for gifts is $14,000 (the same as it was in 2013). Healthcare flexible spending arrangements (FSA) also stay at their 2013 level: the annual dollar limit on employer contributions to employer sponsored health FSAs remains at $2,500.