Trump Tax Cut to Be Eroded Next Year by Inflation Switch

(Wall Street Journal) The Internal Revenue Service on Thursday announced the tax codes parameters for 2019 implementing a new method for making inflation adjustments that will result in higher tax paymentsand government revenueover time. The tax law enacted last year lowered tax rates and reduced tax burdens for most households in 2018. It also required the IRS to switch to a different slower-moving measure of inflation to adjust a variety of tax-code features for rising prices. The standard deduction tax brackets and other items will still increase most years but now they will usually climb more slowly than they would have under the old formula. The result: More income gets taxed at all or taxed at higher rates. The bite starts as a nibble. In 2019 the standard deduction for a married couple will be $24400. The deduction would have been $24550 under the old inflation-adjustment method according to calculations by the Tax Foundation a conservative-leaning group. In the 24 tax bracket making the standard deduction $150 smaller than it otherwise would have been would cost a taxpayer $36 in higher taxes. That will be reflected on tax returns filed in early 2020. The gaps widen over time. Many taxpayers got their largest benefit from the new tax law in 2018 and will watch it shrink annually. When you sit down and figure out your taxes I dont think youre going to notice this amongst all the other noise" said economist Jared Bernstein a senior fellow at the left-leaning Center on Budget and Policy Priorities. The start of the 37 top bracket for individuals set at $500000 for this year will rise to $510300 in 2019 under the new inflation-adjustment method. Under the old system it would have been $512075 the Tax Foundation calculates. By 2025 the gap between the old and new top tax brackets is projected to be $10325. The bites add up over time. Nationally the inflation change will raise $2.1 billion in additional federal tax revenue in fiscal 2019 growing each year to $20 billion in fiscal 2025 and continuing beyond that. Unlike many other tax-code changes the new rules arent scheduled to expire. By 2025 8.9 of taxpayers will pay more than they would have under the previous tax law according to the Tax Policy Center a research group run by a former Obama administration official. In 2018 4.8 of households pay more. It is a broad change to the definition of what is taxable and the change is very subtle" said Kyle Pomerleau director of the Center for Quantitative Analysis at the Tax Foundation. It will take years before it really kicks in and tax bills are noticeably different. However even then it will be hard to tell because everyones economic situation will have changed." Read More