According to the government, there has been little inflation this year. Depending on your viewpoint, this is reason to smile or frown.

On the positive side, taxes in 2016 will not be much different than in 2015. Many of the line items determining what your tax bill will be next year aren’t changing much, if at all, from this year. I spot-checked a few items as I was gathering data for this year’s tax guide (which starts here) and calculated increases of about 0.5%. The actual percentage increases varied depending on how close a number was to its breakpoint for rounding up or down.

On the negative side, there will not be a cost-of-living adjustment (COLA) for Social Security. Those who received benefits this year will receive the same benefit next year. Those of you who delayed filing last year will only see your benefits rise next year in relation to your older age and potentially higher income credits. (One way to increase Social Security benefits is to replace a lower-income year of employment with a higher-income year. This only works if a person has some years with salaries below the maximum income limit subject to Social Security taxes. Claiming strategies, which will be addressed in an upcoming issue, are a related but separate matter.) Furthermore, the lifetime income stream from Social Security for every American currently receiving benefits or likely to receive benefits will be lower than it would have been if there were a cost-of-living adjustment in 2016.

Some of you may scoff at the idea of there being no change in the cost of living. After all, it literally took an act of Congress to limit the size of the increase in Medicare Part B premiums for those with high incomes. A disparity in perceived levels of inflation can exist because the basket of goods and services you use to judge the rate of inflation can differ in both composition and weighting from what the government uses.

There are other implications of low inflation beyond just Social Security. The income limit on contributions to workplace retirement plans [e.g., 401(k) plans] and traditional individual retirement accounts (IRA) will not change. Those of you earning enough to maximize your contributions will be halted from increasing your contributions even further. This does not mean you shouldn’t save more. Depending on your personal situation, you may have the ability to increase contributions to a spouse’s retirement account or contribute to a Roth IRA.

From a tax standpoint, the modest inflation adjustments may bump you into a higher tax bracket next year. This could occur if you are close to the upper end of an income bracket (e.g., 28%) this year and you receive a raise effective at the start of 2016. If this happens, remember that the tax brackets are marginal. Married couples in the 33% tax bracket filing joint returns only pay the 33% tax rate on adjusted income in excess of $230,450. Income below this level is taxed at a lower rate. It’s easy to forget this fact since so much of the discussion about taxes is focused on the top rate instead of the effective rate that individuals and corporations actually pay.

We expanded the tax guide a bit this year. Added are a discussion about Medicare and income (in response to requests to do so), more detail about marital status (including divorce and widowhood), and a new section on tax scams. In doing this, we had to omit Briefly Noted from the printed magazine. You will be able to find it on AAII.com, where we don’t have the space limitations.

Finally, we received word that Peter Katt passed away in late October. Peter contributed articles to the AAII Journal about life insurance for more than 20 years and was always willing to answer my questions. He will be missed.

Wishing you a joyful holiday season,

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII