Inflation Adjustments Under The TJCA

There are some parts of taxes that are so boring that even tax accountants won’t talk about them. For the Tax Cuts and Jobs Act of 2017 (TCJA), the part that puts the accountants to sleep during the work day (yet somehow manages to get the economists’ blood boiling) is the change to inflation.

Changing the tax law is a pain, something we got front row seats to this year. And, unfortunately, we know any numbers our esteemed Congress uses in the law will not stand the test of time. A $1,000 deduction in 1986 is not going to do nearly as much good in 2018, or in 2056, the next time the tax code will be seriously reformed.

So how does our government make it so they don’t have to relook at those numbers and vote in changes every year? They link the numbers to inflation. Then, all those numbers magically change year after year without Congress having to lift a gavel.

The TCJA, though, decided to make a huge change that nobody’s talking about. They decided to update the formula on the Magic Inflation Box.

Look, a free image that says “inflation.” Seems like a good spot for it.

Under the old method, every year an army of IRS agents (or maybe one intern in the basement, I’m really not sure) would look at all the numbers linked for inflation, download the latest the Consumer Price Index, or CPI, then send out an updated list of what our rates will be for the upcoming tax year.

Now, instead of using the CPI, that basement intern is going to have to use the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U, or Chained CPI. All those mean the same thing.

So what’s the difference between CPI and C-CPI-U, other than two letters an a couple of hyphens?

Chained CPI increases slower.

That means your deductions and tax brackets are still going to increase, but they’re going to increase slower than they used to under the old method.

Over time, this will mean a big deal. It’s like that old story of the train, where a small switch made the passengers end up thousands of miles away from their luggage.

It’s going take a long time to make a difference. A really long time. We’re talking awkward Facebook Memories amount of time.  Most people will never notice the difference, especially since most people (except, again, those weird economists) won’t bother comparing what their deduction is versus what it would have been under CPI.

Just keep that in mind in ten years when you feel like your taxes are too high. Go to Congress and demand a change, complaining how much you got screwed over by using the C-CPI-U instead of the CPI. You don’t even have to bother finding out if it’s true. It’ll sound good and be wonky enough they might actually listen to you.