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Can Inflation Help with Your Taxes?

You can file this under good news for taxpayers and retirement planning. The 2008 tax year might be the best you ever had. In terms of found money, money that smart taxpayers can use to fund their retirement plan, an unexpected gift has arrived. And it is inflation.

For most of us, inflation represents less dollars in our pockets for daily necessities. Inflation acts as a tax in a way, deducting the spending power of the money you earn. Is it possible for this much-maligned rate to provide a benefit to taxpayers in 2008? It looks as if the answer is yes.

Inflation for the tax year of 2008 will have the net effect of lowering your taxable salary. This will put you into a lower tax bracket, possibly even if your taxable income increased over the year. Here is what could happen if inflation remains where it is now.

The personal exemption, the break you get for having dependents and the one you get to claim for you biggest dependent Ð you Ð will rise to $3500 which could mean savings of about $100.00 for a family of four.

For those of us that are allowed a standard deduction, specifically anyone who does not itemize their tax return, will also see some savings as well as the amount the are allowed to exclude from their income rise because of inflation.

Inflation will have a nice effect on taxable income as your tax bracket may have changed even if you made more. You can take a look at your 2008 tax bracket (and for those of us who plan for the future, a look at the 2009 tax year as well).

These subtle changes might not net you the thousands in tax savings you would rather have, but found money, even if it is only a couple of hundred dollars is far better than nothing. Who would have expected the saving to come via the inflation rate?