Ohio taxpayers stand to gain as income brackets 'indexed'

The State of Ohio on Monday rolled out "indexed" personal income tax brackets, a change that takes inflation into account for the first time and promises to save almost all taxpayers a few dollars on their returns next spring.

Adjusting the state's tax brackets for inflation will save taxpayers a small amount in its first year - the maximum saving this year is $26 - but it promises to have a larger impact over time as the indexing compounds, experts say.

The income levels associated with each of Ohio's nine income tax brackets will be adjusted upward by 0.9 percent for the 2010 taxable year. This adjustment, based on federal economic data released last week, will shave an estimated $25 million from Ohioans' tax bills when compared to what they would have collectively paid without the adjustment, Ohio Tax Commissioner Richard Levin said.

"Part of the thing with indexing is the effect over time," said John Kohlstrand, a spokesman for the Ohio Department of Taxation. "For a family with a taxable income of $60,000, the savings this year is about $6."

At first blush, one might think that the only taxpayers who would save are those with adjusted gross incomes that fall within the new range - say someone who made $40,200. But everybody saves because Ohio taxpayers pay their taxes in progressively higher bands.

For example, a household with income of $40,200 in 2009 paid: 0.618 percent on the first $5,000 of income, 1.236 percent on the next $5,000, 2.473 percent on the next $5,000, 3.091 percent on the next $5,000, 3.708 percent on income between $20,001 and $40,000, and 4.327 percent on the $200 over $40,000, for a total tax liability, before credits, of $1,121.15.

The same system will apply after the tax rates are indexed, but because the "tax rate bands" have grown larger by indexing them for inflation, taxpayers will get the benefit of the lower tax rate on a larger amount of their income. Under the new indexed system, the same total tax liability is $1,116.21, a saving of $4.94.

Indexing grows in value over time. Had indexing been employed in 2005 as originally proposed, the newly adjusted $10,100 bracket instead would be $11,171.

Jane Glick, a certified public accountant and partner in Maumee-based accounting firm Mosley, Pfundt, Platz, and Glick, said the concept of "compounding" and the impact it has over time seems complicated to most.

"It's hard for people to understand, unless you say compound interest. Then people understand," said Mrs. Glick. She said it will be interesting to see if the tax brackets continue to be indexed as inflation grows in subsequent years.

Ohio's indexing law dates back to 2002, when the legislature called for brackets to be adjusted annually, beginning in 2005.

Before the first adjustment could take place, lawmakers put off implementing the indexing plan in favor of five annual income tax rate cuts of 4.2 percent each. The last of those rate cuts is scheduled for 2011.

About a quarter of the 50 states, including California, Wisconsin, and Minnesota, index their tax brackets for inflation. Michigan does not index its tax brackets.

Contact Larry P. Vellequette at:

lvellequette@theblade.com

or 419-724-6091.