Rev. Proc. 90-7

Rev. Proc. 90-7

SECTION 1. PURPOSE

This revenue procedure provides the income tax inflation adjustment (indexing) factors as determined pursuant to various provisions of the Internal Revenue Code for taxable years beginning in 1990. The revenue procedure applies the factors to the following: the tax rate tables for individuals and for estates and trusts; the basic standard deduction amounts for different filing statuses; the limitation on the standard deduction in the case of certain dependents; the additional standard deductions for the aged and blind; the earned income credit; and the personal exemption.

SEC. 2. BACKGROUND

01 Section 1(f)(1) of the Code provides that not later than December 15 of each calendar year, the Secretary shall prescribe inflation-adjusted tax rate tables that shall apply in lieu of the tax rate tables in subsections (a), (b), (c), (d), and (e) of section 1 with respect to taxable years beginning in the succeeding calendar year.

Under section 1(f)(3) of the Code, the inflation adjustment for a calendar year is determined based on the percentage (if any) by which the Consumer Price Index (CPI) for the preceding calendar year exceeds the CPI for the calendar year 1987. For purposes of computing the inflation adjustment, section 1(f)(4) defines the CPI as the average of the 12 monthly CPIs for the 12-month period ending on August 31 of such calendar year. Under section 1(f)(5), the CPI is that for all-urban consumers published by the Department of Labor.

Section 1(f)(2)(A) of the Code provides that the inflation adjustment is reflected in the tax rate tables by increasing the minimum and maximum amounts subject to the 15% and 28% tax brackets. Under section 1(f)(6), an adjusted bracket amount is "rounded down" to the nearest multiple of $50 ($25 for a table for married individuals filing separately).

02 Under section 63(c)(4) of the Code, the standard deduction amounts (including the limitation for certain dependents and the additional standard deduction for the aged or blind) are adjusted for inflation under the method described in section 1(f)(3). Section 1(f)(6)(A) provides that, in general, an adjusted amount is "rounded down" to the nearest multiple of $50. Section 1(f)(6)(B), as amended by the Revenue Reconciliation Act of 1989 (the Act), Pub. L. No. 101- 239, section 7831, 103 Stat. 2106 (1989), provides that the adjusted amount of the basic standard deduction is rounded by $25 in the case of married individuals filing separately.

03 Section 32(i) of the Code provides that the dollar amounts of the limitations applicable to the earned income credit are adjusted for inflation under the method described in section 1(f)(3) except that the preceding calendar year's CPI shall be compared with the CPI for the calendar year 1984. This adjustment is not subject to the $50 "rounded down" rule described above. Instead, under section 32(i)(3), a dollar amount limitation that is not a multiple of $10 is rounded (not rounded down) to the nearest multiple of $10 (or, if the increase is a multiple of $5, it is increased to the next highest multiple of $10).

04 Section 151(d)(3) of the Code provides that for taxable years beginning after 1989 the personal exemption amount is adjusted for inflation under the method described in section 1(f)(3) except that the preceding calendar year's CPI shall be compared with the CPI for the calendar year 1988. The adjusted exemption is "rounded down" to the nearest multiple of $50 under section 1(f)(6) as amended by section 7831 of the Act.

SEC. 3. INFLATION ADJUSTMENT FACTORS

01 Tax rate tables and standard deduction-- The CPI for 1989 is 122.1500000000 and the CPI for 1987 is 111.9833333333. Based on these figures, the inflation adjustment factor for the tax rate schedules and standard deductions for taxable years beginning in 1990 is 1.0907873195.

02 Earned income credit -- The CPI for 1989 is 122.1500000000 and the CPI for 1984 is 102.4916666667. Based on these figures, the inflation adjustment for the earned income credit for taxable years beginning in 1990 is 1.1918042117.

03 Personal exemption -- The CPI for 1989 is 122.1500000000 and the CPI for 1988 is 116.6166666667. Based on these figures, the inflation adjustment for the personal exemption for taxable years beginning in 1990 is 1.0474489067.

SEC. 4. ADJUSTED TAX RATE TABLES

01 The following adjusted tax rate tables are prescribed in lieu of the tables in subsections (a), (b), (c), (d), and (e) of section 1 of the Code with respect to taxable years beginning in 1990.

 TABLE 1 -- Section 1(a). -- MARRIED INDIVIDUALS FILING JOINT RETURNS

                                    Begins              Ends

      Section 1(a)                  $162,770

SEC. 5. ADJUSTED STANDARD DEDUCTION

01 The following adjusted standard deduction amounts are prescribed in lieu of the amounts set forth in section 63(c)(2) of the Code with respect to taxable years beginning in 1990.

           Filing Status                      Standard Deduction

03 Section 63(f) of the Code provides for an additional standard deduction amount of $600 for the aged and blind. That amount is increased to $750 if the individual is also unmarried and not a surviving spouse. The $600 and $750 amounts are subject to adjustment for inflation. Applying the factor set forth in section 3.01 above to the $600 and $750 figures results in figures of $654.47 and $818.09, respectively. Accordingly, due to the $50 "rounding-down" provisions of section 1(f)(6), the additional standard deduction amount for the aged and blind for tax years beginning in 1990 is $650 and that amount is increased to $800 if the individual is also unmarried and not a surviving spouse.

SEC. 6. ADJUSTED EARNED INCOME CREDIT

01 Section 32 of the Code provides an "earned income" credit for taxpayers who have dependent children and maintain a household. Generally, "earned income" includes wages, salaries, and other employer compensation, plus earnings from self-employment. Under section 32, the credit is equal to 14 percent of the first $5,714 of earned income. The credit is phased out at a rate of 10 percent of the amount of adjusted gross income (or, if greater, the earned income) that exceeds $9,000. The $5,714 and the $9,000 figures are subject to an inflation adjustment.

02 As stated in section 3.02 above, for taxable years beginning in 1990 the inflation adjustment factor for the earned income credit is 1.1918042117. Accordingly, for taxable years beginning in 1990, the credit is equal to 14 percent of the first $6,810 of earned income. The credit will be phased out at a rate of 10 percent of the amount of adjusted gross income (or, if greater, the earned income) that exceeds $10,730. The maximum credit allowable will be $953.40 (.14 X $6,810). The credit will phase out completely at $20,264 of adjusted gross income, or earned income, as the case may be ($10,730 plus ($953.40/.10) = $20,264).

SEC. 7. ADJUSTED PERSONAL EXEMPTION

01 Section 151(b) of the Code generally allows a taxpayer an exemption for himself or herself. Section 151(c) generally allows a taxpayer additional exemptions for dependents as defined in section 152. As provided in section 151(d)(1), the exemption amount for taxable years beginning after 1988 is $2,000. The $2,000 amount is subject to adjustment for inflation.

02 As stated in section 3.03 above, for tax years beginning in 1990 the inflation adjustment factor for the personal exemption is 1.0474489067. Applying the factor to the $2,000 figure set forth in section 151(d)(1) of the Code results in a figure of $2,094.89. Accordingly, due to the $50 "rounding-down" provisions of section 1(f)(6), the personal exemption for tax years beginning in 1990 is $2,050.

SEC. 8. EFFECTIVE DATE

This revenue procedure is applicable for all taxable years beginning in 1990.

SEC. 9. DRAFTING INFORMATION

The principal author of this revenue procedure is John Moran of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Moran on (202) 566-9293 (not a toll-free call).

The economist responsible for development of the factors set forth in this revenue procedure is Mary-Helen Risler of the Research Division, Office of the Assistant Commissioner (Planning, Finance and Research). For further information regarding these factors, contact Ms. Risler on (202) 376-0720 (not a toll-free call).