Inflation Affects Us AllFeb 15th, 2011 | By Submitted | Category: Editorials
Business & Tax Insights
By Mark Buescher, C.P.A.
Although economic conditions in North Florida have been difficult the last two years, to say the least, there have been some rays of sunshine. One of these has been a low inflation rate.
In 2010, the average inflation rate was 1.53 percent. This is a sharp contrast compared to 1980, when we suffered another economic downturn. Inflation in that year hit a whopping 14.7 percent. Interest rates soared to as high as 20 percent in April, 1980. Both businesses and consumers suffered greatly, particularly those on fixed incomes.
Fortunately, our current rate of inflation is at historically low averages. When inflation is low, consumers and businesses are better able to make long-range plans because they know that the purchasing power of their money will hold and will not be steadily eroded year after year.
Low inflation also means lower nominal and real interest rates. Lower real interest rates reduce the cost of borrowing and, in turn, encourages households to buy durable goods, such as automobiles and refrigerators. If we keep inflation under wraps, our economy will eventually gain a stronger foothold and we will return to prosperity.
But we, as consumers and taxpayers, are not the only ones that keep a watchful eye on inflation. The IRS closely monitors the rate as well. Our tax laws require that certain tax numbers be adjusted for inflation each year. Since inflation was minimal in 2010, most of these numbers are unchanged or change slightly for 2011. However, there are a few worth noting as we consider tax planning this year.
For instance, the standard mileage rate, which employees not only use for reimbursement purposes, but business owners use in computing their deductions, increased from 50 cents per mile to 51 cents per mile, effective January 1, 2011. The rate for medical and moving mileage increased from 16.5 cents per mile to 19.0 cents per mile.
Another benefit of low inflation relates to social security tax. The maximum earnings subject to social security tax remains at $106,800. The earnings limit for those under full retirement age is $14,160. For those at full retirement age, which varies from age 65 to 67, there is no earnings limit.
Another threshold that remains the same in 2011 is the “nanny tax”, which is $1,700 for this year. If you pay household workers more than this amount during the year, you’re responsible for payroll taxes.
The “kiddie tax” threshold is unchanged for 2011 as well, thanks to low inflation. If your child is under age 19 (under age 24 for students) and has more than $1,900 of unearned income, such as dividends and interest income, the excess could be taxed at the parents top tax rate in 2011.
On the downside, certain limits that we would like increased, however, remain unchanged due to low inflation. The maximum individual retirement account (IRA) contribution you can make in 2011 remains unchanged at $5,000 if you’re under age 50 and at $6,000 if you are 50 or older. The maximum amount of wages employees can put into a 401(k) plan remains at $16,500, unless you are 50 or older. In which case, you can contribute up to $22,000 in 2011.
As we progress through the year, keep a watchful eye on inflation. It affects our finances from many different prospectives, including that of taxation. For now, count your blessings that inflation is low and that we can properly plan for our financial future.
Mark Buescher, CPA is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.