WASHINGTON – The tax cut last year will begin to shrink.
The Internal Revenue Agency announced on Thursday the parameters of the tax code for 2019, applying a new method of adjusting inflation that will result in higher tax payments and government revenue over time.
The shift will cost US $ 133.5 billion for a decade, according to the Joint Taxation Congress.
The tax law introduced last year lowered tax rates and reduced tax rates for most households in 2018. It also urged the IRS to turn to a different, slower inflation measure to adapt a variety of tax code features for increasing prices.
The normal deduction, tax scales and other items will increase even more, but now they will usually go up slower than they would have under the old formula.
The result: Most revenue is taxed at all or taxed at higher rates.
The sting starts like a fluff. In 2019, the regular discount for a married couple will be $ 24,400. The deduction would be $ 24,550 according to the old method of adjusting inflation, according to calculations from the Taxation Foundation, a conservative group.
In the 24% tax strand, making the standard $ 150 deduction smaller than otherwise would be the cost of a taxable $ 36 in higher taxes. This will be reflected in the tax declarations submitted in early 2020.
Gaps are widening over time. Many taxpayers gained the most benefit from the new tax law in 2018 and will watch it shrink annually.
"When you sit down and calculate your taxes, I do not think you will notice it in all the other noises," said economist Jared Bernstein, senior partner of the left-wing priority center for budget and policy.
The launch of the $ 375,000 threshold for individuals this year will increase to $ 510,300 in 2019 with the new inflation adjustment method. Under the old system would be $ 512,075, the Tax Foundation estimates. By 2025, the gap between the old and the new upper tax limits is expected to be $ 10,325.
Stings are added over time. At national level, inflation will increase $ 2.1 billion in additional federal tax revenues in the financial year 2019, increasing each year $ 20 billion in fiscal year 2025 and continuing beyond that. Unlike many other changes to the Tax Code, the new rules are not scheduled to expire.
By 2025, 8.9% of taxpayers will pay more than they would have in accordance with the previous tax law, according to the Center for Tax Policy, a research team run by a former Obama administration official. In 2018, 4.8% of households pay more.
"It is a big change in the definition of what is taxable and the change is very fine," said Kyle Pomerleau, director of the Center for Quantitative Analysis at the Taxation Institute. "It will take years before they really start, and taxes are noticeably different, but then it will be hard to say why the economic situation of each one will have changed."
The IRS announcement came a few weeks later than it is typical. Typically, the tax office lists the brackets next year in October.
Technically, the new tax law has changed from the use of the traditional inflation measure, called CPI-U, to a version known as a chained CPI or consumer price index.
Many economists see the chain-linked CPI as more accurate because it better reflects consumers' tendency to buy cheaper alternatives as prices rise. The measure usually grows more slowly than the CPI-U. For tax purposes in 2019, inflation measured by the rise in the consumer price index was 2.06%, compared to 2.42% for the CPI-U, according to the Taxation Institute.
This change is meaningful, said Mr Bernstein, who was advisor to Vice-President Joe Biden. But Mr Bernstein added that lawmakers should consider other changes to offset the impact on low-income households. Measured as a share of income, the transition to the chain-linked CPI affects low-income households at least, according to the 2013 analysis by the Center for Tax Policy.
During last year's fiscal debate, Democrats are opposed to the move, worried that Republicans will then try to implement a chained CPI on spending programs such as Social Security. This will slow down the growth of benefits, a move pursued by supporters of reducing federal budget deficits.
President Obama proposed this idea in bilateral talks on the budget that eventually collapsed.
Several functions of the Tax Code are not indexed for inflation. For example, Congress simply doubled the child tax credit to $ 2,000 and gradually put it in an annual income of over $ 200,000 for individuals and $ 400,000 for married couples.
Apart from the fact that Congress is acting, none of these figures increases with inflation and the value of child credit is decreasing, contributing to the gradual weakening of tax cuts last year.
Among other changes announced by the IRS on Thursday, the maximum income tax credit for families with three or more qualifying children will rise to $ 6,557 from $ 6,431.
The dividing line between the 24% and 32% brackets will now be $ 160,725 for individuals and $ 321,450 for married couples, from $ 157,500 and $ 315,000 this year. In 2018, these thresholds were marked by and starting from the gradual abolition of the new tax deduction for business income for certain businesses. But because of the rounding of the Tax Code, the two figures are starting to diverge in 2019. The pass rate is raised to $ 160,700 for individuals and $ 321,400 for married couples, slightly less than the parentheses change.
The tax exemption for real estate per person will amount to $ 11.4 million from $ 11.18 million. the annual gift tax exemption remains $ 15,000.
Write to Richard Rubin at [email protected]