A sneak peek at 2008 tax savings

By Kiplinger's Personal Finance Magazine

It's time for taxpayers to tip their hats in gratitude to an economic force that customarily earns far more curses than kudos: inflation.

That's the insidious force that used to systematically march taxpayers into higher tax brackets simply because their salaries rose to keep up with the cost of living. Now, when inflation eats away at the value of your dollars, at least the tax system is adjusted so you're not also hit with a stealth tax increase.

With the August inflation numbers released by the government Sept. 19, Kiplinger is able to calculate inflation adjustments for 2008 -- the numbers you'll use when you file your 2008 tax return in spring 2009. It will be weeks before the Internal Revenue Service gets around to officially announcing the changes triggered by the inflation numbers. But you don't have to wait.

• The personal exemption, which you claim for yourself and each dependent, will rise to $3,500 for 2008, up $100 from the 2007 level. For folks in the 25% bracket, that will save 25 bucks for each exemption claimed. For a husband and wife with two kids, the savings will add up to $100.

• The standard deduction, which is used by nearly two-thirds of taxpayers, will increase for each filing status. Singles will get a $100 boost, to $5,450 from this year's $5,350. Married couples filing jointly will see their standard deduction rise to $10,950, $250 more than they can claim on 2007 returns. The standard deduction for heads of household who do not itemize deductions will increase $150, to $8,000, on 2008 returns.

• The tax brackets will become broader, meaning that more of your income will be taxed at lower rates. The 10% bracket on 2008 joint returns will cover the first $16,050 of taxable income, Kiplinger estimates. That's $400 more than in 2007. Taxing that amount at 10% rather than 15% will save couples $20. That's not enough for a wild celebration, perhaps, but the higher your income, the more you save as more dollars fall into lower brackets. As the top of the 15% bracket rises, for example, some income that used to be taxed at 25% will be hit by the 15% rate.

The bottom line

Adjusting the tax law for inflation means that if your income stays the same, your tax bill will almost certainly decline in 2008, regardless of whether lawmakers in Washington enact tax cuts.

The higher standard deduction and exemption amounts and the inflation-adjusted tax brackets will trigger a $130 savings for a single person who earns $50,000 and claims the standard deduction on his or her 2008 tax return. A married couple who earn $100,000 in 2007 and '08 and who have two children will enjoy a $310 savings thanks to the inflation adjustments.

Remember, the new numbers presented here are for the 2008 tax year. So, you'll use them -- and reap the savings -- when you file your 2008 return in spring 2009.

The adjustments, however, do not cover the dreaded alternative minimum tax. That higher tax was originally aimed at the well-to-do, but it's not indexed for inflation and, as a result, has been snaring more middle-income taxpayers each year.

Continued: Other inflation adjustments

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