The consumer price index (CPI) figure was released in August by the Bureau of Labor Statistics. These numbers are used to determine next year's tax bracket. Even though taxpayers will not start filing their 2013 tax returns until January 2014, tax year 2013 parameters are needed in advance of 2013 so that the IRS can produce instructions for 2013 income tax withholding, says Nick Kasprak, a programmer and analyst at the Tax Foundation.
Projecting the tax brackets is more complicated than normal given the uncertainty regarding the expiration of the Bush tax cuts as well as tax cuts in the stimulus bill. However, Kasprak projects next year's tax brackets under different scenarios with a high degree of certainty.
- If the Bush tax cuts expire, the tax rate for the lowest income bracket will be 15 percent and the rate for the highest income bracket will be 39.6 percent.
- However, if the Bush tax cuts are extended under H.R. 8, then the rate for the lowest income bracket will be 10 percent and the rate for the highest income bracket will be 35 percent.
But if Obama's 2013 budget gets approved, it would allow the Bush tax cuts to expire for only upper income payers.
- The rates for the lowest income bracket would be 10 percent whereas the highest earners would still have a tax rate of 39.6 percent.
- Head of Household filers in the second highest income bracket will have a tax rate of 36 percent compared to a 33 percent tax rate if the Bush tax cuts are extended.
H.R. 8, the proposal that would extend the Bush tax cuts and Obama's 2013 budget, takes different approaches to several taxes and deductions that are set to be patched or expired in the upcoming year.
- The personal exemption will rise by $100 to $3,900 regardless of what happened to the Bush tax cuts. However, for married filers, the standard deduction could decrease if the Bush tax cuts are extended.
- The Personal Exemption Phase-Out and PEASE (named for former Senator Donald Pease) are provisions that phase out tax benefits for upper income taxpayers. Both disappeared in 2010, however if the Bush tax cuts expire, both provisions would return next year.
- Finally, the Alternative Minimum Tax (AMT) would have an exemption at $50,600 for single filers and $79,850 for married filers if H.R. 8 passes. But Obama's budget would permanently index the AMT for inflation and set the exemption at $48,450 for single filers and $74,450 for married filers.
Source: Nick Kasprak, "Next Year's Tax Brackets," Tax Foundation, October 1, 2012; National Center for Policy Analysis.