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How Inflation Will Cut Your Taxes in 2014

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Most of the time, inflation is one of the most serious financial threats people face, propelling slow but steady price increases that erode the purchasing power of your savings and make it harder to make ends meet.

But when it comes to your taxes, inflation's bite need not be too painful: The government makes annual adjustments to the tax code to reflect the higher cost of living, which should help you save on your taxes in 2014.

1. Higher Standard Deductions

The standard deduction allows taxpayers to earn income up to a certain amount without paying any taxes -- and without going to the trouble of itemizing deductions. For 2014, the figure for single filers will rise by $100 to $6,200, with joint filers getting a $200 increase to $12,400. Those who qualify as heads of household split the difference, with their standard deduction jumping $150 to $9,100. Depending on your filing status and tax bracket, these increases could save you anywhere from $10 to $80 on your 2014 tax return.

2. Higher Personal Exemptions

Most taxpayers get to take a personal exemption for each member of their families, including dependents. The personal exemption amount will climb by $50 to $3,950 in 2014. The increase could boost tax savings anywhere from $5 to $20 per person depending on your tax bracket, although high-income taxpayers begin to have personal exemptions phased out once their income goes above certain levels.

3. Higher Tax Brackets

The boundaries of the various tax brackets get an inflation adjustment in 2014, allowing taxpayers to earn more money while getting taxed at a lower rate.

For instance, single filers will see the upper end of the 10 percent tax bracket rise from $8,925 to $9,075, while the top of the 15 percent tax bracket will rise from $36,250 to $36,900. By taxing more of your income at lower rates, these shifts will produce tax savings of $72.50 for a single filer earning $40,000 in taxable income. Higher-end earners will reap more substantial savings: Joint filers with taxable income of $250,000 will see a drop of more than $400 in their taxes.

4. Higher Earned Income Tax Credits

Millions of working low-income taxpayers are eligible to receive the Earned Income Tax Credit. The maximum credit amount rises $99 in 2014 for joint filers with three or more qualifying children, with an $88 increase for those with two children, $54 for one-child families, and $9 for eligible individuals with no children.

5. Higher Exclusions for Foreign Workers

If you work abroad, you're entitled to exclude money you earn in wages or salaries from your foreign job. The amount of money you're able to exclude will rise in 2014 by $1,600 to $99,200, producing savings of $160 to $640 depending on your tax bracket. The exclusion is designed to offset the taxes that foreign workers typically pay in the countries in which they work.

6. Higher Exemptions for Alternative Minimum Tax

The Alternative Minimum Tax was originally designed to apply only to the richest taxpayers -- its purpose being to prevent the wealthy from gaming the system and paying no taxes at all. But over time, thanks to inflation, the tax gradually started capturing more upper-middle-class taxpayers, especially in states that have high taxes that aren't deductible for AMT purposes. In 2014, the exemption amount of AMT will rise by $900 to $52,800 for single filers and by $1,300 to $82,100 for joint filers. With AMT rates at 26 percent and 28 percent, those increases can save between $234 and $364 in potential AMT liability.

These are just a sampling of the many ways that cost-of-living inflation adjustments will lower taxes for millions of Americans. For more information, be sure to visit the IRS website and get the comprehensive list of inflation adjustments for 2014.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.


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11 Comments

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hsmith5973

How does the work? Fifteen percent of $100 is $15 -- Fifteen percent of an inflated $100, or $200, is $30 -- doubled. Have I really saved?

January 16 2014 at 5:02 PM Report abuse rate up rate down Reply
mgh406

You forgot to mention that the threshold for income tax on Social Security recipients has not been adjusted for inflation since Slick Willy was POTUS. Another screw the seniors policy. Let's compensate and screw them with 'Chained CPI' to further cut the value of their earned benefits.

January 03 2014 at 2:50 PM Report abuse rate up rate down Reply
Nobear

I am not an economist , but the way I see it those in the middle income dont get jack **** in the amount of tax savings. 40,000 to 85,000. It is a contrived story on the part of the Obama white house in projecting cost of living and inflation.

January 02 2014 at 7:50 PM Report abuse +2 rate up rate down Reply
1 reply to Nobear's comment
mgh406

CONTRIVED STORY ? Be honest FLAGRANT LIES!

January 03 2014 at 2:58 PM Report abuse +1 rate up rate down Reply
vlady1000

oh boy,..........So I will save 5 cents on every dollar of inflation.......what a deal!!

January 02 2014 at 6:41 PM Report abuse +4 rate up rate down Reply
1 reply to vlady1000's comment
mgh406

Bend over and brace yourself, the worse is yet to come.

January 03 2014 at 2:59 PM Report abuse +1 rate up rate down Reply
jj2301

The article should be entitled: How redistribution will improved your tax-year takeaways - at the expense of taxpayers.

January 02 2014 at 6:10 PM Report abuse +3 rate up rate down Reply
ga7smi

inflation is treated with high interest rates - they are commong to a theatre near you soon

January 02 2014 at 4:17 PM Report abuse +5 rate up rate down Reply
COMMON SENSE

Everyone sees inflations in everything except social security

January 02 2014 at 3:55 PM Report abuse +3 rate up rate down Reply
packard54

So, let's see. If a person earnes $15K per year, they will receive several tax cuts and the SCHMUCK who earns $75K will be taxed to the full extent. Kinda makes you ask WHY is it so great to succeed? The Russians tried this and FAILED. It was tried in Venezuela and it FAILED. Yet the SHCMOES of the US believe this rubbish and also still line up at the box office to pay a FORTUNE to see a mindless flick starring overpaid LEFTIST actors. Happened in Germany about 80 years ago. It also FAILED.

January 02 2014 at 12:31 PM Report abuse -1 rate up rate down Reply
1 reply to packard54's comment
rgkarasiewicz

Very well stated. One can always count on the polticians to tax the middle class to death while simultaneously granting huge tax breaks for their rich benefactors.

January 02 2014 at 5:40 PM Report abuse rate up rate down Reply
1 reply to rgkarasiewicz's comment
mcgowann

So true, racquetguy1. The top 50% pays 104% of all taxes. The bottom 50% get more back in taxes than they pay in through earned income interest as well as being the ones who benefit from entitlement programs. They have no skin in the game.

January 16 2014 at 3:59 PM Report abuse rate up rate down
jdykbpl45

Obama Care taxes?

January 02 2014 at 12:05 PM Report abuse -2 rate up rate down Reply