Inflation Adjustments Affecting Individual Taxpayers in 2006: Analysis and Commentary

Abstract

Without inflation adjustments to key portions of the tax system, individuals would be faced with an erosion of their purchasing power. Beginning in 1985, Congress implemented an indexation procedure to adjust various income tax components, including the tax rate schedules, standard deduction, and personal and dependency exemptions. Although suspended by the Tax Reform Act of 1986, indexation resumed in 1989 and now applies to many items in the tax system.

In this article, Young discusses 2006 inflation adjustments to specific portions of the individual tax system that are tied to a consumer price index year ending in August. Items adjusted by that indexation procedure include the tax rate schedules, standard deductions, exemptions (and related phaseout), the overall limit on itemized deductions, the annual gift tax exclusion, and some computational elements related to the unearned income of minor children, child credit, earned income tax credit, adoption expenses, educational savings bonds, education credits, education loan interest, qualified transportation fringe benefits, medical savings arrangements (Archer MSAs), health savings accounts, long-term care insurance premiums, and the section 179 expense election.