inflation Archives - Live Debt Free

Here we offer the tax brackets and standard deduction information for the tax years 2011 and 2012, along with a few “revolutionary” thoughts on the income tax.

Income tax history and philosophy

Thanks to the 16th Amendment the government can tax income:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The Bureau of Labor Statistics uses the inflation rates of the Consumer Price Index for All Urban Consumers (CPI-U), along with a host of other statistics, to calculate yearly tax brackets.

Income levels in tax brackets raise each year due to inflation, and inflation over the past year averaged 2.43%.

Inflation is a rise in the general level of prices of goods and services in an economy related to an increase in the volume of currency and resulting in the loss of purchasing power. The rate of decrease in the purchasing power of money is approximately equal to the rate of inflation.

Put another way, as inflation rises, purchasing power (a.k.a. wealth) decreases.

“1913 wasn’t a very good year. 1913 gave us the income tax, the 16th amendment and the IRS.” – Texas Congressman Ron Paul

Before revealing the modern income tax brackets, it’s worth noting that the Supreme Court ruled income taxation unconstitutional in 1895 before the Congress enacted it as law in 1913.

Federal Income Tax Brackets for 2012

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Federal Income Tax Brackets for 2011

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Note: Annual inflation is also used to calculate the standard deduction and personal exemptions.

Standard Deduction and Exemption for 2012

The value of each personal and dependent exemption, available to most taxpayers, is $3,800.

The standard deductions for 2012 are:

$5,950 for singles and married individuals filing separately
$8,700 for heads of household
$11,900 for married couples filing a joint return.

Standard Deduction and Exemption for 2011

The value of each personal and dependent exemption, available to most taxpayers, is $3,700.

The standard deductions for 2011 are:

$5,800 for singles and married individuals filing separately
$8,500 for heads of household
$11,600 for married couples filing a joint return.

Note: These numbers are projected and subject to new tax legislation therefore they could change so be sure to check www.IRS.gov for the latest information before filing taxes.

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References

2012 Consumer Price Index Summary by The Bureau of Labor Statistics
Overview of BLS Statistics on Inflation and Prices by The Bureau of Labor Statistics
Tax Foundation Projects 2012 Tax Parameters by The Tax Foundation
16th Amendment from The U.S. Government Printing Office
Inflation on Wikipedia
How To Calculate Inflation Rate on Inflationdata.com
Pollock v. Farmers’ Loan & Trust Co. – 157 U.S. 429 (1895) on Justia.com U.S. Supreme Court Center
Publication 501 Exemptions, Standard Deduction, and Filing Information on IRS.gov

This is a guest post by SD Guy

We’ve been hearing about inflation for a long time. You can inflate a lot of things, (a beach ball, a whoopee cushion, etc.) but the type of inflation I’m referring to is economic – “rise in the general level of prices of goods and services in an economy over a period of time” (Wikipedia) Inflation means your money is worth less now than it was a year ago. It’s a small difference, but it adds up – your dimes and nickels don’t buy near as much as they did 100 years ago.

According to the June 2009 edition of Forbes magazine, the American economy may, for the first time in 54 years, see falling prices (deflation). This means that over the next little while you’ll notice lower than usual prices on some of the things you buy regularly. Forbes estimates the decline in prices of consumer goods will continue through 2010.

So what does this mean for us?

At least for the next little while you’ll be able to get more for your money (literally). It probably won’t be a significant change, but in Japan for example, prices dropped 3.8% from the year before. If you’ve got a $2,000 monthly budget, you’d be saving about $76 dollars a month.

As a general price drop occurs, you might find companies more willing to negotiate the prices for their goods and services – the good ones would rather drop prices a bit or offer a discount rather than lose you as a customer. Obviously you’ll need to be proactive, and search opportunities out, but finding the right time to push could save you a couple extra bucks.

The book ‘Five Lessons a Millionaire Taught Me’ refers to the ‘Seven Magic Words’ – “Is that the best you can do?” – as a negotiation mainstay. Asking can’t hurt – they’ll either say “no” – or drop the price. Capitalizing on opportunities to negotiate a lower price is a useful tool for bargain hunters, and the time to sharpen these skills may be now!

What to Watch Out For

You want to take advantage of this ‘break’ as early & as often as possible.

Historically, wages have changed in respect to the inflation rate, and deflation means slightly lower wages. Your salary will slowly align with the overall economic state.

While lower prices sound great for consumers, they’re a scary proposition for businesses. It was deflation that fueled the flames of the Great Depression – businesses weren’t able to make enough money to keep their doors open. Currently, businesses have legitimate concerns that spiraling prices are hurting business, causing more layoffs, and reducing the ability of companies to create new products and new jobs.

So what’s the answer?

If you have been saving up for a major purchase, you might be rewarded with a golden opportunity sometime in the next few months. Patience and preparedness are important, and if you’re ready you might stumble onto a great deal. If you’re just plugging along, you’ll probably find a few more bucks in your budget you can save for a rainy day.

*All statistics pulled from the June 2009 edition of Forbes Magazine

Tax Brackets and Standard Deduction