8512 / What indexing factor does the IRS use to make the adjustments for inflation?
The 2017 tax reform legislation provides that items that are adjusted annually for inflation will be adjusted based on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), as published by the Department of Labor, for tax years beginning after December 31, 2017 (this change is therefore permanent).2
Planning Point: One key criticism of this modification to the inflation indexing method was that it could push more taxpayers into higher tax brackets more quickly than under prior law. This is both because of the fact that C-CPI-U indexing makes it appear that inflation is growing faster than under CPI indexing, and because many employment-related increases in income are based on the CPI. Tax policy center research shows that, since 2000, the C-CPI-U has grown at a consistently slower rate than the CPI.3
Essentially, the C-CPI-U is designed to take into account the fact that individuals change their purchasing habits as the cost of certain goods increases or decreases (in order to substitute lower priced goods for higher priced goods). C-CPI-U is designed to take into account purchasing patterns both before and after a price change.
Regardless of the system used, in calculating the new tax rate schedules, for example, the minimum and maximum dollar amounts for each rate bracket (except as described below) are increased by the applicable cost-of-living adjustment. The rates (percentages) themselves are not adjusted automatically for inflation. This method of increase explained above, however, does not apply to the phase out of the marriage penalty in the 15 percent bracket.4
The Secretary of the Treasury has until December 15 of each calendar year to publish new tax rate schedules (for joint returns, separate returns, single returns, head of household returns and for returns by estates and trusts) that will be effective for taxable years beginning in the subsequent calendar year.5 As a practical matter the new numbers for the following tax year are often available as early as October of the preceding year. For a schedule of current tax rates, see Q 8510.
1. IRC §§ 1(f)(3), 1(f)(4).