But thanks to a rule change that the Internal Revenue Service made Thursday, a lot of Americans will reportedly be paying a bit more in taxes in 2019 than they thought they would–and even more in later years. Eventually, maybe a lot more.
It all comes down to a simple math equation–or more accurately a series of simple math equations. Because the tax law uses particular dollar amounts to establish thresholds for different things–tax brackets, the amounts of deductions, etc.–the IRS has to adjust many of these numbers for inflation each year.
Traditionally, the IRS has used a calculation called CPI-U to compute inflation. (CPI stands for “consumer price index,” and the U stands for “urban.”) But besides cutting taxes, the law also required the IRS to change to a different calculation.
So, on Thursday, the IRS announced how it’s making this big change, to something called “chained CPI.” The difference between the two, as The Wall Street Journal explains, is that under “chained CPI,” inflation moves more slowly.
So, legal thresholds like the standard deduction that taxpayers are eligible to take, and the income needed to move into a higher tax bracket, will go up more slowly than they otherwise would.
“The result,” the Journal’s Richard Rubin writes, while noting that it’s unusual for the IRS to issue guidance like this so late in the year: “More income gets taxed at all, or taxed at higher rates.”
It’s difficult to calculate exactly how much any individual taxpayer will see their taxes go up as a result of this change, since everyone’s circumstances are different, and usually change from year to year.
. But Congress’s Joint Committee on Taxation says it will cost U.S. taxpayers $133.5 billion over a decade.
The whole thing will be gradual–meaning a slight increase in taxes in 2019, and bigger increases in later years as the difference between CPI-U and chained CPI becomes more pronounced over time.
Here’s an example of how it all plays out:
- For 2019, the standard deduction for married couples will be $24,400 now that the IRS is using chained CPI.
- If CPI-U were still in effect, the standard deduction would have been $24,550, according to data from the conservative Tax Foundation that was reported by the Journal.
- Since taxpayers would now be entitled to a slightly lower deduction, they’d pay more taxes: about $36 more if they were in the 24 percent tax bracket.
Obviously, $36 isn’t exactly the end of the world, but the amount increases in later years, as the gap between the new “chained CPI” and CPI-U becomes wider.
By 2025, the whole thing will mean that 8.9 percent of taxpayers will pay more under the new law than they would have if there hadn’t been any change, according to data cited by the Journal.
If the IRS didn’t have to make this change, only about 4.8 percent of taxpayers would pay more under the 2017 tax law than they did before–largely residents of so-called blue states, who lost the ability to deduct state and local taxes from their federal taxes.
Interestingly, the Journal reports that because this change is basically a different way of calculating a math problem, rather than a change in the law itself, it’s likely that most taxpayers never would have realized they were paying more.
But it’s happening, and it means that after the IRS’s action, the tax cut apparently won’t be as big as people thought it would. If you’re counting on that money yourself–or if you’re a business owner who hoped that your clients would have a bit more disposable income to spend–you’ll want to be aware of it.