Indexing Piles on Tax Relief: CCH Releases Tax Projections For 2004

(RIVERWOODS, ILL., September 18, 2003) – All individual taxpayers subject to the general rate bracket tables are about to get an extra helping of relief as indexing for inflation will lower taxes even more next year on top of the rate tax cuts inaugurated for the 2003 tax year, according to CCH INCORPORATED (CCH), a leading provider of tax law information and software. CCH today released estimated income ranges for each 2004 tax bracket.

Millions of taxpayers have already seen their likely 2003 and 2004 tax bills reduced because of legislation earlier this year that lowered many tax rates, increased the amount covered by the bottom, 10-percent, bracket and increased the standard deduction for joint filers.

“A dramatic piece of tax legislation can suddenly slash thousands of dollars from an individual’s tax bill, while indexing works to limit additional taxes if people’s incomes rise in line with inflation,” said George Jones, JD, LLM, senior federal tax analyst for CCH.

“But while some tax cuts in recent years are only temporary, and are scheduled to be followed by increases down the line, indexing works year after year, and it’s likely to be a part of the tax laws for the foreseeable future irrespective of whether Congress plans to tinker more with the tax rates themselves.”

Two examples show the modest tax savings generated by indexing:

  • A married couple filing jointly with total taxable income of $100,000 could pay $145 less in income taxes in 2004 due to indexing alone. Add to this the marriage penalty relief afforded by the 2003 tax law and the rate bracket reductions, however, and they pay $2,231 less.
  • A single filer with taxable income of $50,000 will contribute $72.50 less next year because of inflation adjustments.

    Inflation Adjustments

    For more than a decade, the U.S. tax code has required that federal income tax brackets and certain other figures be adjusted for inflation annually.

    The adjustment is based on Consumer Price Index figures for September through August immediately prior to the adjusted year. CCH’s projections are based on the relevant inflation data released September 16, 2003, by the U.S. Department of Labor.

    Annual inflation adjustments have been inserted into the Internal Revenue Code in recent years with increasing frequency.

    For example, the Code now requires over 50 other inflation-driven computations to determine deduction, exemption and exclusion amounts in addition to the 40 separate computations needed to inflation-adjust the tax bracket tables each year.

    The IRS usually releases official numbers in December of each year. CCH tax bracket projections are provided for illustrative purposes only, and should not be used for income tax returns or other federal income tax related purposes until confirmed by the IRS later this year.

    Some Items Not Indexed

    Jones observed that some items in the Code are not indexed for inflation and stay the same, while others rise from 2003 to 2004 by dollar amounts already written into the tax law.

    “The maximum amount of modified adjusted gross income allowed for rolling over a regular IRA into a Roth IRA has been stuck at the $100,000 level since 1998 and will remain there for 2004, with no inflation adjustment,” Jones said. “Another major tax figure, the child credit, remains at its 2003 level of $1,000 for 2004, but watch out! … it is scheduled to plummet to $700 in 2005. The limit on 401(k) plan elective deferrals, on the other hand, has a $1,000 increase built in by the Internal Revenue Code; that brings the maximum amount of pre-tax salary allowed to be socked away in a 401(k) plan to $13,000 in 2004,” he observed.

    Indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets – in the 15-percent rather than the 25-percent bracket, for example.

    “This also means that across-the-board inflation adjustments to the brackets provide more relief for those in the upper brackets, since they share in the reduction within each bracket, not just their own marginal tax bracket,” Jones noted.

    Adjustments Add Up Over Time

    Even so, for many people, the size of the “tax cut” generated over the past several years by these inflation-factor increases is substantial.

    “In 1999, the 15-percent bracket ended at $43,050 for joint filers, while for 2004, the amount covered by the top of the 15-percent bracket has increased to $58,100. Of that total, $ 8,450 (as adjusted for 1999 brackets) is due to the marriage penalty relief in the 2003 tax law. The rest – which totals $6,600 per taxpayer at the top of the 2003 15-percent bracket – is due to inflation adjustments,” said Jones.

    Standard Deduction, Personal Exemption Also Rise

    Adjusted for inflation, the standard deduction and personal exemption amounts also are projected to increase for 2004. These increases can produce lower taxes by lowering the taxpayer’s taxable income:

    • Married couples filing jointly will see a projected $200 increase in their standard deduction, to $9,700 in 2004. This comes on top of a $1,550 increase in their 2003 standard deduction mandated by provisions in 2003 tax legislation.
    • Single taxpayers could see a $100 increase over 2003 in their standard deduction, to $4,850.

      The additional standard deduction for those age 65 or older or who are blind remains unchanged at $950 for married individuals and surviving spouses. It increases for single filers by $50 to $1,200. The personal exemption amount will go up in 2004 by $50 to $3,100.

      Here, too, the inflation adjustments add up over time. For example, since 1988, the standard deduction for single taxpayers has grown by over 60 percent, from $3,000 to the anticipated $4,850 amount for 2004.

      Taxpayers can, however, lose much of the value of personal exemptions and itemized deductions when their incomes rise above certain levels. Those “phaseout” levels are also adjusted for inflation. For 2004, married couples filing jointly will begin to lose some of the value of any itemized deductions when their adjusted gross income exceeds $142,700. They will begin to lose some of the value of their personal exemptions when their adjusted gross income exceeds $214,050.

      For a complete look at how income ranges for each tax bracket are projected to shift next year, see the attached CCH chart.

      Expensing Election

      Another notable increase for 2004 is the amount that small business can immediately write off for the purchase of a business asset in its first year of use. The 2003 Tax Relief Act quadrupled the amount, from $25,000 to $100,000 for 2003. For 2004, it rises to $102,000, thanks to a required inflation adjustment.

      “Kiddie” Deduction, Gift Tax Exemption

      In general, inflation adjustments are rounded to the next-lower multiple of $50, so if the adjustment produces an increase of less than $50, no increase is made. The “kiddie” standard deduction, used on the returns of children who are claimed as dependents on their parents’ returns last increased in 2001, from $700 to $750. For 2004, it will rise to $800.

      The tax code only allows the gift tax exemption to rise when the inflation adjustment would produce an increase of $1,000 or more. That last happened in 2001, when the exemption increased from $10,000 to its current $11,000. This year’s inflation figures don’t support a further increase, so the exemption will remain unchanged for 2004 (and most likely for 2005, given the anticipated rate of inflation).

      About CCH INCORPORATED

      CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, insurance, human resources, health care and small business markets. CCH is a Wolters Kluwer company. The CCH web site can be accessed at cch.com. The CCH tax and accounting web site can be accessed at tax.cchgroup.com.

      CCH INCORPORATED’s 2004 TAX PROJECTIONS1

      Married Filing Jointly (& Surviving Spouse)

      2004 Taxable Income Tax Rate 2003 Taxable Income Tax Rate
      $0-$14,300 10% $0-$14,000 10%
      $14,300-$58,100 15% $14,000-$56,800 15%
      $58,100-$117,250 25% $56,800-$114,650 25%
      $117,250-$178,650 28% $114,650-$174,700 28%
      $178,650-$319,100 33% $174,700-$311,950 33%
      over $319,100 35% over $311,950 35%

      Married Filing Separately

      2004 Taxable Income Tax Rate 2003 Taxable Income Tax Rate
      $0-$7,150 10% $0-$7,000 10%
      $7,150-$29,050 15% $7,000-$28,400 15%
      $29,050-$58,625 25% $28,400-$57,325 25%
      $58,625-$89,325 28% $57,325-$87,350 28%
      $89,325-$159,550 33% $87,350-155,975 33%
      over $159,550 35% over $155,975 35%

      Single Filers

      2004 Taxable Income Tax Rate 2003 Taxable Income Tax Rate
      $0-$7,150 10% $0-$7,000 10%
      $7,150-$29,050 15% $7,000-$28,400 15%
      $29,050-$70,350 25% $28,400-$68,800 25%
      $70,350-$146,750 28% $68,800-$143,500 28%
      $146,750-$319,100 33% $143,500-311,950 33%
      over $319,100 35% over $311,950 35%

      Head of Household

      2004 Taxable Income Tax Rate 2003 Taxable Income Tax Rate
      $0-$10,200 10% $0-$10,000 10%
      $10,200-$38,900 15% $10,000-$38,050 15%
      $38,900-$100,500 25% $38,050-$98,250 25%
      $100,500-$162,700 28% $98,250-$159,100 28%
      $162,700-$319,100 33% $159,100-$311,950 33%
      over $319,100 35% over $311,950 35%

      Standard Deduction Amounts
      Filing Status 2004 2003 Increase
      Married Filing Jointly
      (& Surviving Spouse)

      $9,700

      $9,500

      $200
      Married Filing Separately $4,850 $4,750 $100
      Single $4,850 $4,750 $100
      Head of Household $7,150 $7,000 $150
      Standard Deduction for Dependents (“Kiddie” Standard Deduction)
      2004 2003 Increase
      $800 $750 $50
      Income Level At Which 3-Percent Itemized
      Deduction Limitation Takes Effect
      (Adjusted Gross Income)
      Filing Status 2004 2003 Increase
      Married Filing Jointly
      (& Surviving Spouse)

      $142,700

      $139,500

      $3,200
      Married Filing Separately $71,350 $ 69,750 $1,600
      Single $142,700 $139,500 $3,200
      Head of Household $142,700 $139,500 $3,200
      Personal Exemption Amounts
      2004 2003 Increase
      $3,100 $3,050 $50

      Threshold for Personal Exemption Phaseout
      Filing Status 2004 2003 Increase
      Married Filing Jointly
      (& Surviving Spouse)

      $214,050

      $209,250

      $4,800
      Married Filing Separately $107,025 $104,625 $2,400
      Single $142,700 $139,500 $3,200
      Head of Household $178,350 $174,400 $3,950

      Gift Tax Exemption
      2004 2003 Increase
      $11,000 $11,000 $0

      1.) These numbers are projected for the 2004 tax year and have not been confirmed by the Internal Revenue Service.

      AUTHOR

      Wolters Kluwer Tax and Accounting

      Wolters Kluwer Tax and Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. Wolters Kluwer Tax and Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2016 annual revenues of €4.3 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

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