Downstream from Low Inflation

By Justin Bolmgren

One downside to low inflation is that those who collect Social Security won't be getting an increase in their monthly checks in 2016. Annual increases in Social Security are determined every year and based on changes in a component of the consumer price index known as CPI. The index fell 0.4% in the period used by the government to calculate the annual increase in cost-of-living adjustments, the Labor Department recently reported. The “boost” in benefits would normally kick in on Jan. 1.  For example, Social Security recipients got a 1.7% cost-of-living adjustment in 2015, 1.5% in 2014 and 1.7% in 2013. The last times there were no increases were in 2010 and 2011.  No such “boost” next year.

The CPI measures the cost of goods and services; therefore, in theory, things got less expensive this year. Federal income tax brackets tend to also get attention from CPI data and inflation adjustments are now routinely included in new tax legislation which can be confusing for taxpayers. Luckily, there are tax professionals out there who can sort it all out for you.

In September, Bloomberg BNA released its predictions for the coming tax year and they’re betting on the idea that most taxpayers will find a little bit of relief in 2016. According to Bloomberg  BNA, taxpayers whose incomes are the same compared to last year may enjoy a lower effective tax rate – and a lower tax bill – because of the inflation adjustments.  Meaning according to their view: though your pension and social security payments will be unchanged, tax bracket thresholds will nudge upward, thus lowering your overall tax burden.  

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