Taxpayers stuck in the current economic downturn will get at least some relief in 2011 thanks to the mandatory upward inflation adjustments called for under the tax code, according to the tax-information company CCH, which recently released estimated income ranges for each 2011 tax bracket.

CCH also projects the growing number of other inflation-sensitive tax figures, such as the personal exemption and the standard deduction.

"Indexing for inflation has become an established part of our tax system, and it's likely to be a part of the tax law for the foreseeable future, even as Congress debates changes to the tax rates themselves," says George Jones, a senior federal tax analyst with CCH.

Projections this year, however, are clouded by the uncertainty of expiring provisions in the tax code. If Congress allows the tax cuts within the Economic Growth and Tax Relief and Reconciliation Act of 2001 to expire, as called for at the end of 2010, many taxpayers could lose more ground than they will otherwise gain.

When there is inflation, indexing of brackets lowers tax bills by including more of people's incomes in lower brackets. The formula used in indexing showed a relatively small amount of inflation this year, just under 1.5 percent. This is far greater, however, compared with the 0.18 percent inflation factor used to set 2010 tax amounts.

For 2011, the big question isn't whether the brackets will continue to increase because of inflation—they will. Rather, it's what tax rates will be applied against those brackets. The current 10 percent, 15 percent, 25 percent, 33 percent, and 35 percent rates are scheduled to change back to 15, 28, 31, 36, and 39.6 percent at the end of this year.

In addition, there are two possible alternative scenarios being debated by lawmakers. Either extend the current tax brackets in their entirety, or, as proposed by President Obama, keep the current rate structure except revive the 36 percent and 39.6 percent rates, starting at a higher income bracket level. He also would amend the standard deduction so it doesn't revive the marriage penalty that had been in place prior to the 2001 tax cuts.

In other words, Jones notes, it gets complicated quickly without knowing which approach Congress will take.

"While we were looking at the very real possibility of deflation in the tax adjustment required under the tax code last year, this year we are back to normal in the sense that the expected upward adjustment in tax benefits from 2010-2011 are taking place," he says. "The only wild card remains how Congress will deal with the sunsetting provisions. We may not know that until a possible lame-duck session of Congress this December."

Here are some examples of the tax savings generated by indexing, and how they would be reversed if the 2001 tax cuts were to expire wholesale:

•Because of inflation adjustments, a married couple filing jointly with taxable income of $100,000 should pay $112.50 less in income taxes in 2011 than they will on the same income for 2010 (compared with a $12.50 savings in 2010). That savings remains whether the tax cuts are fully extended or President Obama's proposal is adopted. If the rates and marriage penalty relief sunset entirely, however, the couple will end up paying $3,143 more in taxes in 2011.

•A single filer with taxable income of $50,000 should owe $56 less next year due to the adjustments (versus $6.25 this year). Even with those savings, however, the filer will owe $834 more in 2011 if complete sunset of the rates takes place.

Since the late 1980s, the U.S. tax code has required that federal income tax brackets be adjusted for inflation annually, and inflation adjustments have been inserted into the Internal Revenue Code in recent years with increasing frequency. For example, the code now requires more than 50 other inflation-driven computations to determine deduction, exemption, and exclusion amounts. In fact, the health-care reform legislation passed earlier this year adds an even greater number of inflation adjustments to the code, although health-related indexing won't start until 2013.

Most adjustments are based on Consumer Price Index figures for September through August immediately prior to the adjusted year. Some inflation-adjusted figures, however, are computed earlier and some later.

The IRS usually releases official numbers by December each year. CCH tax-bracket projections are provided for illustrative purposes only, and should not be used for income tax returns or other federal income tax related purposes until confirmed by the IRS later this year.

Jones says some items in the code aren't indexed for inflation and stay the same, while others rise by dollar amounts already written into the tax law.

"The exemption amounts for the alternative minimum tax are not indexed, which means that each year Congress must either increase the amounts by statute or expose additional households to the AMT," Jones says.

For 2009, Congress set the AMT exemption amounts at $46,700 for single individuals and $70,950 for married couples filing jointly. There is no technical requirement under the tax code to increase those amounts for inflation. While they are scheduled to revert to the default amounts of $33,750/$45,000 without action, the Obama administration tax proposals contemplate further increases.

Meanwhile, the standard deduction and personal exemption amounts also are subject to indexing, though because of "rounding down," some years there are no changes. After very little movement in the 2010 amounts, 2011 will see a jump in all standard deduction levels. If the current tax cuts expire, however, the marriage penalty relief that has been built into the standard deduction for married couples filing jointly will be eliminated. Rather than double the standard deduction for unmarried single filers, the 2011 standard deduction for joint filers would drop by $1,750 to $9,650, even taking the past year's inflation into account.

Assuming that Congress will not let any of the standard deduction amounts sunset, however, the standard deduction for single taxpayers, heads of households, and marrieds filing separately will all increase by $100 in 2011. The standard deduction for joint filers would rise by $200, to $11,600. Any increase in the standard deduction, of course, can produce lower taxes by decreasing the taxpayer's taxable income.

Taxpayers have had to lose a good portion of the value of personal exemptions and itemized deductions when their incomes rise above certain levels, which have also been adjusted for inflation. For 2010, these "phase-outs" disappeared from the tax code, but only temporarily if Congress does not act.

As part of the 2001-cuts sunset, they are scheduled to return in 2011, with a personal exemption phase-out range starting at $254,350 for joint filers and $169,550 for single filers and a phase-out range for itemized deductions starting at $169,550 for all filers except married couples filing separately, whose phase-out range for itemized deductions starts at $84,775.

"The removal of limitations on itemized deductions and personal exemptions, rather than indexing of brackets, will provide major tax savings in 2010 for many well-off taxpayers. The return of these limitations in 2011 would pose an equally important change in the reverse direction," Jones says.

CCH, a Wolters Kluwer business, is a global provider of tax, accounting, and audit information, software, and services. It has served tax, accounting, and business professionals since 1913.