IRS to Recompute 2018 Inflation Adjusted Numbers Due to TCJA Requirement to Use Chained CPI

The Tax Cuts and Jobs Act modified IRC §1(f)(3) to use the chained consumer price index (C-CPI-U) rather than the standard consumer price index (CPI-U) for most inflation adjustments for tax years beginning after December 31, 2017.

Wikipedia offers the following summary explanation of the “chained CPI”:

The United States Chained Consumer Price Index (C-CPI-U), also known as chain-weighted CPI or chain-linked CPI is a time series measure of price levels of consumer goods and services created by the Bureau of Labor Statistics as an alternative Consumer Price Index. It is based on the idea that in an inflationary environment, consumers will choose less-expensive substitutes. This reduces the rate of cost of living increases through the reduction of the quality of consumed goods. The "fixed weight" CPI also takes such substitutions into account, but does so through a periodic adjustment of the "basket of goods" that it represents, rather than through a continuous estimation of the declining quality of goods consumed. [1]

The effective of this provision posed a problem that many observers recognized—the IRS had already released inflation adjusted numbers for 2018 computed under the standard CPI (CPI-U rather than C-CPI-U).  The numbers for most tax related figures were released in Revenue Procedure 2017-58 on October 19, 2017, with retirement plan numbers released in Notice 2017-64.

In an article published in the January 29, 2018 edition of Tax Notes, Harlan Weller, an actuary in the Treasury Office of Benefits Tax Counsel, is cited as confirming that the IRS will be recalculating the inflation adjusted numbers for all 46 separate IRC sections that are now required to be computed using the C-CPI-U rather than CPI-U index. [2]

While some of the provisions affected are not applicable in 2018 due to the changes found in TCJA (such as the amount of the exemption for dependents), may others remain in effect for 2018.  Some of the affected provisions that will impact 2018 taxes include:

  • Adoption credit dollar amounts
  • Phase-outs for the lifetime learning credit
  • Various items related to the earned income credit
  • Maximum repayment of amounts related to the premium tax credit
  • Above the line deduction for educators
  • Annual limit on health FSA deferrals to cafeteria plans
  • Medical deduction limits on long-term care premiums
  • IRA deductible contribution limits
  • Roth IRA AGI based dollar amount limits
  • Foreign earned income exclusion amount
  • Applicable exclusion amount for estate and gift taxes
  • Maximum amount of present interest gifts that are not subject to gift tax
  • Penalty for an individual failing to maintain health insurance.
  • The amounts of a large number of penalties recently made subject to inflation adjustment

Since the C-CPI-U generally results in a lower amount of reported inflation, any numbers that end up being adjusted will most likely be at a lower level than was originally reported to apply for 2018.

Mr. Weller didn’t provide any specific time frame when these revised numbers would be available, but noted that advisers need to watch for them to come at some point in the future.

For the moment advisers just need to be aware that the inflation adjusted amounts that were published during 2017 to apply to 2018 should be treated solely as an approximation of what the 2018 numbers will be, as well as recognize that if a number changes it likely will go down.

[1], January 27, 2018

[2] Stephanie Cummings, “Inflation Figures Being Recalculated, Treasury Official Confirms”, Tax Notes, January 29, 2018, 2018 TNT 19-9,, January 27, 2018