Each year, over 40 tax provisions are adjusted by the IRS for inflation. This is done to stop the “bracket creep”, which means that people don’t see a real increase in income, but inflation places them in a higher tax bracket anyway. The result is that you must always be aware of the most recent IRS federal tax tables.
How The IRS Federal Tax Tables Are Calculated:
Calculations are made using the CPI (Consumer Price Index), which calculates inflation for the previous year. Based on that, they adjust the credit values, deduction amounts, and income thresholds. The 2017 IRS federal tax tables are going to be adjusted so that the 39.6% income tax rate will affect those who earn $418,400 or more per year as a single filer, or $470,70 as joint filing married couples.
Personal Exemption and Standard Deduction:
Single filers will see a $50 increase in their standard deduction. For joint filing married couples, this will be $100. The personal exemption, meanwhile, will remain unchanged at $4,050.
PEP and Pease Provisions:
Next, there are the PEP and Pease provisions, which have been implemented in the tax code so that high-income earners pay more tax. PEP (Personal Exemption Phaseout) and Pease (after Senator Donald Pease) are both designed to phase out itemized deduction once someone’s adjusted gross income is more than a certain amount. In 2017, the PEP and Pease threshold will increase to $261,500 for single filers. Joint filing married couples will see it increase to $318,800. At $384,000 for single filers and $436,300 for joint filing married couples, the PEP will end. This means that taxpayers above this level with adjusted gross income will no longer see an exemption benefit.
Alternative Minimum Tax (AMT):
AMT was implemented during the 1960s to stop high-earners from being able to avoid the individual income tax. It is, effectively, a parallel tax system. This means that those on high incomes must calculate their taxes twice, once under the standard IRS federal tax tables and once under the AMT. The higher of the two is what the taxpayer has to pay.
AMT uses the Alternative Minimum Taxable Income (AMTI). Systems are in place to help low- to middle-earners from having to pay it, particularly that a lot of income is exempted from AMTI. However, for high-earners, this is phased out at two rates, 26% and 28%. For 2017, the exemption for singles is $54,300 and, for joint filing married couples, it is $84,500. The 28% rate is applied to all tax payers who earn over $187,800, and for joint-filing married couples who earn $93,900. AMT exemptions are currently set at 25ct/$ once they go over the threshold. In 2017, this exemption will start at $120,700 for single filers, and $160,900 for joint filing married couples.
Earned Income Tax Credit (EITC):
Joint filers, heads of households, and singles will have a maximum EITC of $510 if there are no children. A $3,400 credit is applied for a single child. Two children stand at $5,616, and three or more stand at $6,318. These are very small increases compared to last year.