SECTION 4. COMPUTATION OF

INFLATION ADJUSTMENTS

.01 Tax Rate Tables . (1) Section 1(f)(1) provides that not later than December 15 of each calen

dar year, the Secretary shall prescribe inflation-adjusted tax rate tables that apply in lieu of the tax rate tables in § 1 with respect to tax years beginning in the succeeding calendar year.

(2) Under § 1(f)(3), the inflation adjustment for a calendar year is the percentage (if any) by which the Consumer Price Index (CPI) for the preceding calendar year exceeds the CPI for the calendar year 1992. However, § 1(f)(7)(A) provides that in prescribing the inflation adjustments for the 36 percent and 39.6 percent tax rate brackets, the preceding calendar year’s CPI is compared with the CPI for the calendar year 1993. For purposes of computing the inflation adjustment, § 1(f)(4) defines the CPI as the average of the 12 monthly CPIs for the 12month period ending on August 31 of such calendar year. Under § 1(f)(5), the CPI is that for all-urban consumers published by the Department of Labor.

(3) Section 1(f)(2)(A) provides that the inflation adjustment is reflected in the tax rate tables by increasing the minimum and maximum dollar amounts for each rate bracket. Under § 1(f)(6), an adjusted bracket amount is ‘‘rounded down’’ to the nearest multiple of $50 ($25 in the case of married individuals filing separately).

.02 Kiddie Tax . Section 1(g)(4) uses the limitation on the standard deduction for certain dependents under § 63(c)(5)(A) in computing the ‘‘kiddie tax.’’ That limitation is adjusted for inflation under § 63(c)(4). The inflation adjustment computation under § 63(c)(4) is described below in section 4.04.

.03 Earned Income Tax Credit . Section 32(i) provides that the ‘‘earned income amounts’’ and ‘‘phaseout amounts,’’ which limit the earned income tax credit, are adjusted for inflation under the method described in § 1(f)(3), except that the preceding calendar year’s CPI is compared with the CPI for the calendar year 1993. Under § 32(i)(2), an adjusted amount is rounded to the nearest multiple of $10 (or, if the adjusted amount is a multiple of $5, it is increased to the next highest multiple of $10).

.04 Standard Deduction . Under § 63(c)(4), the standard deduction amounts (including the limitation for certain dependents and the additional standard deduction amounts for the aged and for the blind) are adjusted for inflation under the method described in § 1(f)(3), except that the preceding

calendar year’s CPI is compared with the CPI for the calendar year 1987. Under § 1(f)(6), an adjusted amount is ‘‘rounded down’’ to the nearest multiple of $50 ($25 in the case of the basic standard deduction for married individuals filing separately).

.05 Overall Limitation on Itemized Deductions . Section 68(b)(2) provides that the ‘‘applicable amount’’ for the overall limitation on itemized deductions is adjusted for inflation under the method described in § 1(f)(3), except that the preceding calendar year’s CPI is compared with the CPI for the calendar year 1990. Under § 1(f)(6), the adjusted ‘‘applicable amount’’ is ‘‘rounded down’’ to the nearest multiple of $50 ($25 in the case of married individuals filing separately).

.06 Qualified Transportation Fringe . Section 132(f) provides that the limitation on the amount of the exclusion from gross income for a qualified transportation fringe is adjusted for inflation under the method described in § 1(f)(3). See section 4.01 above. Under § 132(f)(6)(B), an increased amount that is not a multiple of $5 is ‘‘rounded down’’ to the next lowest multiple of $5.

.07 Income from United States Sav- ings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses . Section 135(b)(2)(B) provides that the dollar amount at which the phaseout of the exclusion (of income from the redemption of United States savings bonds for taxpayers who pay qualified higher education expenses) begins is adjusted for inflation under the method described in § 1(f)(3). The preceding calendar year’s CPI is compared with the CPI for the calendar year 1992. The adjusted dollar amount is rounded to the nearest multiple of $50 (if the adjusted figure is a multiple of $25, it is increased to the next highest multiple of $50) under § 135(b)(2)(C).

.08 Personal Exemption . (1) Section 151(d)(4)(A) provides that the personal exemption amount is adjusted for inflation under the method described in § 1(f)(3), except that the preceding calendar year’s CPI is compared with the CPI for the calendar year 1988. The adjusted exemption is ‘‘rounded down’’ to the nearest multiple of $50 under § 1(f)(6).

(2) Section 151(d)(4)(B) provides that the ‘‘threshold amounts’’ at which the phaseout of the tax benefit of the personal exemptions begins are ad justed for inflation under the method described in § 1(f)(3), except that the preceding calendar year’s CPI is compared with the CPI for the calendar year 1990. Under § 1(f)(6), an adjusted ‘‘threshold amount’’ is ‘‘rounded down’’ to the nearest multiple of $50 ($25 in the case of married individuals filing separately).

.09 Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns .

(1) Section 513(h)(2)(C) provides that the maximum cost of a ‘‘low cost article’’ is adjusted for inflation under the method described in § 1(f)(3), except that the preceding calendar year’s CPI is compared with the CPI for the calendar year 1987.

(2) Rev. Proc. 90–12 provides for the adjustment of the ‘‘low cost article’’ and the ‘‘$25 payment’’ limitations in that revenue procedure as provided under § 513(h)(2)(C). The ‘‘$50 benefit’’ limitation in that revenue procedure is adjusted in the same manner.

.10 Luxury Automobile Excise Tax . (1) Section 4001(e) provides that the ‘‘$30,000 amount’’ threshold for the excise tax on a luxury automobile in §§ 4001(a) and 4003(a) is adjusted for inflation. The adjustment, before rounding, is the excess of (A) the ‘‘$30,000 amount’’ increased by the method described in § 1(f)(3), except that the preceding calendar year’s CPI is compared with the CPI for the calendar year 1990, over (B) the dollar amount in effect under § 4001(a) for the calendar year. Under § 4001(e)(1)(B), the adjusted ‘‘$30,000 amount’’ is ‘‘rounded down’’ to the nearest multiple of $2,000.

(2) Section 4001(e)(1) further provides that the adjusted and rounded amount shall apply to the calendar year subsequent to the year on which the cost of living calculations are based. This means that the inflation adjustment factor for the $30,000 amount for tax years beginning in 1996 is computed by comparing the CPI for calendar year 1994 with the CPI for the calendar year 1990.

.11 Reporting Exception for Certain Exempt Organizations with Nondeduct- ible Lobbying Expenditures . Section 5.05 of Rev. Proc. 95-35 provides that the ‘‘$50 exception’’ amount is adjusted for inflation under the method described in § 1(f)(3), except that the preceding calendar year’s CPI is com

450 1995–2 C.B.

pared with the CPI for the calendar year 1994. The adjusted ‘‘$50 exception’’ amount is rounded up to the next highest dollar.

SECTION 5. 1996 INFLATION ADJUSTMENT FACTORS

.01 1994 Base Year Adjustments . The CPI for 1995 is 151.0750000000 and the CPI for 1994 is 146.9000000000. This results in an inflation adjustment factor of 1.0284206943. This factor applies to the reporting exception for certain exempt organizations with nondeductible lobbying expenditures for tax years beginning in 1996.

.02 1993 Base Year Adjustments . The CPI for 1995 is 151.0750000000 and the CPI for 1993 is 143.1750000000. This results in an inflation adjustment factor of 1.0551772307. This factor applies to the 36 percent and 39.6 percent brackets of the tax rate tables, and to the earned income tax credit for tax years beginning in 1996.

.03 1992 Base Year Adjustments . The CPI for 1995 is 151.0750000000 and the CPI for 1992 is 138.9250000000. This results in an inflation adjustment factor of 1.0874572611. This factor applies to the 15 percent, 28 percent, and 31 percent brackets of the tax rate tables, to the qualified higher education expense exclusion, and to the qualified transportation fringe limitations for tax years beginning in 1996.

.04 1990 Base Year Adjustments . ( 1 ) T h e C P I f o r 1 9 9 5 i s 151.0750000000 and the CPI for 1990 is 128.0583333333. This results in an inflation adjustment factor of 1.1797357975. This factor applies to the phaseout of personal exemptions and to the limitation on itemized deductions for tax years beginning in 1996.

( 2 ) T h e C P I f o r 1 9 9 4 i s 146.9000000000 and the CPI for 1990 is 128.0583333333. This results in an inflation adjustment factor of 1.1471334678. This factor applies to the luxury automobile excise tax threshold for tax years beginning in 1996.

.05 1988 Base Year Adjustments . The CPI for 1995 is 151.0750000000 and the CPI for 1988 is 116.6166666667. This results in an inflation adjustment factor of 1.2954837788. This factor applies to the personal exemption for tax years beginning in 1996.

.06 1987 Base Year Adjustments . The CPI for 1995 is 151.0750000000 and the CPI for 1987 is 111.9833333333.

This results in an inflation adjustment factor of 1.3490846852. This factor applies to the ‘‘kiddie tax,’’ the standard deduction amounts, and the insubstantial benefit limitations for charitable contributions for tax years beginning in 1996.