WASHINGTON — The Internal Revenue Service has updated the tax year 2018 annual inflation adjustments to reflect changes from the Tax Cuts and Jobs Act (TCJA). The tax year 2018 adjustments are generally used on tax returns filed in 2019.
The tax items affected by TCJA for tax year 2018 of greatest interest to most taxpayers include the following dollar amounts:
- The standard deduction for married filing jointly rises to $24,000. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,000; for heads of households, $18,000.
As with many numbers in the U.S. tax code (for example, the foreign earned income exclusion maximum amount), FBAR penalties increase periodically due to inflation.
Recently, the IRS announced that FBAR penalties for noncompliance would be increased for penalties assessed after January 15, 2017. A brief summary of the FBAR requirement and the new penalty amounts are the subjects of this blog.
The FBAR Requirement – A Quick Background Read More
Ever since the Reagan Administrative, tax brackets have been indexed for inflation. This avoids bracket creep when taxpayers move into a higher tax bracket because inflation pushes up their income. The thinking is that inflation increases are not real increases in earnings, so the rate tables should be indexed to avoid tax increases arising solely from inflation. This seems like less of an issue today with relatively tame inflation rates, but remember that inflation went into the teens in some years in the 1970’s making bracket creep a big issue. Read More
The Social Security Administration (SSA) announced that the maximum earnings subject to the Social Security component of the FICA tax will increase from $127,200 to $128,700 for 2018. This means that for 2018, the maximum Social Security tax that employers and employees will each pay is $7,979.40 ($128,700 x 6.2%).
A self-employed person with at least $128,700 in net self-employment earnings will pay $15,958.80 ($128,700 x 12.40%) for the Social Security part of the self-employment tax.
The Medicare component remains 1.45% of all earnings, and individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly, $125,000 for married filing separately) will pay an additional 0.9% in Medicare taxes.
The purpose of this post is to explore how inflation results in the facilitation of enhanced penalty collection in America today.
What is inflation? “Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.” Read More
Our federal tax system includes numerous dollar amounts, such as for the standard deduction amount, personal exemption amount, credits, where different tax rates start and end, and defining the parameters of a “small taxpayer.” Some of these amounts are adjusted for inflation and others are not. Should they all be? That’s a good question.
I think where the tax rates of the graduated rate system start and end should be adjusted annually for inflation. This prevents “bracket creep” where a taxpayer is pushed into a higher tax bracket just because their income increased by the rate of inflation (yet their buying power and sense of wealth remained the same). The same logic calls for adjusting the standard deduction and personal exemption amounts. Read More