Earlier this year California already raised income taxes by .25%, but now it seems that our income taxes will go up a little bit once again. This time it is due to deflation and it is not widely publicized.
This change will pretty much affect everyone who pays any income taxes because tax brackets are being pushed lower due to deflation. In this chart from the LA Times you can see how the brackets are changing this year. For us the increase will be around $150 on top of the extra 0.25% we are already going to pay. It is not a huge deal, but it is interesting because this instance of lowering the tax bracket is very rare.
On the flip side, it is possible that deflation will lower the assessments of property taxes for Californian homeowners next year. This depends on the California Consumer Price Index numbers in October. If this happens then Californians may see their property taxes go down a little bit, but it is also not significant considering that the deflation number is around 0.7% right now. So on a $300,000 assessment with a 1.1% property tax rate, the 0.7% deflation will save a homeowner around $23 for the entire year.
I don’t think most Californians will feel the tax changes due to deflation, but it is possible that deflation could affect federal tax brackets next year, too. Additionally, the IRS uses annual CPI to figure out limits for things such as IRA and 401k contributions, so those limits may not increase. Although the deflation rate is quite small now, it is definitely something to keep an eye on.
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3 comments ↓
Xin lu, do you own your own place now?
You can actually save a lot more on prop taxes by just sending in some comps.
Shogun
Hi Financial Samurai,
We bought my in-law’s home last year since they left the country. If you want to read the story it’s here: http://baglady.dreamhosters.com/2008/10/04/yep-were-buying-a-house/. Since it was a parent to child transfer we were able to use Proposition 58 to keep their assessment from the early 90s plus 15 years or so of 2% increases from Prop 13. New comps are still 200k above our basis so we are fine where we are now. There is also a proposition 193 in California for grandparents to grandchildren transfers that doesn’t trigger reassessment. We had to file an application after we bought the home and have my in laws certify our relationship and pay a little application fee to the county, but it didn’t trigger a reassessment.
Obviously, this is a special case and I don’t know if there are similar laws in other states.
Hi Xin Lu – good stuff! Way to go on saving taxes and keeping that tax base low! Gosh, we hate taxes at our site….. but it is what it is.
I think it is absolutely FANTASTIC you are donating most of your blog revenue to the community. In fact, we’ve been thinking about that too since we started the site, and we’ll highlight your site as good inspiration as well
Good to see you went to Cal. Go Bears!
Shogun
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