Low inflation means shallow increase in tax benefit thresholds

The IRS has announced its annual cost-of-living and inflation adjustments for 2017, offering a bump that is much more modest than the increase in wages subject to Social Security. Tax laws require the IRS to adjust the dollar amounts of dozens of tax provisions each year to account for inflation, which remained low in 2017. The tax brackets were adjusted with an approximate inflation rate of just 1.2%.

Several important thresholds remain unchanged. Contributions to 401(k) plans and individual retirement accounts will remain capped at $18,000 and $6,000 respectively (not including catch-up contributions), and the annual gift tax exclusion will remain $14,000 for the fifth year in a row. Most IRS items are adjusted according to the consumer price index for urban consumers, but some items can remain unchanged even with inflation because they are adjusted only if the change is $1,000 or more.

The biggest increase, unfortunately, came in the wage cap on Social Security taxes, which is adjusted based on wages instead of general inflation. It remained unchanged in 2016 for the first time in several years, but is getting a big bump in 2017 from $118,500 to $127,200.

For more information, see Tax Flash 2016-13.

Contact Eddie Adkins
Partner, Washington National Tax Office
+1 202 521 1565

Jeff Martin
Senior Manager, Washington National Tax Office
+1 202 521 1526

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