By Marcia Richards Suelzer, Toolkit Staff Writer
The amounts specified in dozens of federal tax provisions will be higher in 2012 due to legally required inflation adjustments, the IRS has announced. These new dollar amounts apply to returns filed for the 2012 tax year, which will be filed by most taxpayers in early 2013.
Think ahead. Year-end tax planning often includes decisions about whether to accelerate income and expenses into the current year or defer them into the next tax year. In order to make these determinations, it is necessary to have a ballpark sense of whether your tax liability will be higher or lower next year. The annual adjustments will help you gauge the amount of deductions you can claim and your tax bracket for the coming year.
The following are adjustments that are likely to benefit nearly every taxpayer:
- Exemption Amounts: Each personal and dependent exemption claimed on a 2012 return will be worth $3,800, up $100 from 2011.
- Standard Deduction Amounts: Nearly two-thirds of taxpayers opt for the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes. Those taxpayers will benefit from a higher standard deduction amount in 2012.
- Married Couples, filing joint returns: $11,900 for 2012, up $300;
- Singles and Married, filing separately: $5,950 for 2012, up $150;
- Head of Household: $8,700 for 2012, up $200; and
- Dependents (those who may be claimed on another person's tax return, but who file their own return): the greater of (1)$950 or (2) the person's earned income plus $300.
- The additional standard deduction for the blind and senior citizens remains at $1,150 for married individuals and $1,450 for singles and heads of household.
- Tax-Bracket Amounts: The income thresholds for each tax bracket are increased; the amount of the increase depends upon the filing status (e.g., married filing jointly, single, head of household or married, filing separately). For example, for a married couple filing a joint return, the 2012 taxable-income threshold for the 25-percent tax bracket kicks in at $70,700, up from $69,000 in 2011.
In addition to these nearly universal provisions, numerous deductions, credits and related phase-outs also have been adjusted. Among the more popular of these are
- Education-Related Provisions: The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. However, there is no adjustment for single taxpayers--the phase-out ranges for singles remain at the 2011 levels.
- Kiddie Tax Provisions: The amount used to reduce the net unearned income reported on the child's return subject to the "Kiddie Tax" is $950. The same amount is used to test whether the child's gross income can be included in the parent's gross income. For 2012 tax years, the alternative minimum tax exemption for a child subject to the Kiddie Tax is limited to the sum of (1) the child's earned income for the taxable year, plus (2) $6,950.
- Earned Income Credit: For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate-income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
- For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts.
- Single coverage: minimum annual deductible, $2,100; maximum annual deductible, $3,150; and maximum annual out-of-pocket expenses, $4,200.
- Family coverage: minimum annual deductible, $4,200; maximum annual deductible, $6,300, and maximum annual out-of-pocket expenses, $7,650.
For those who wish to see all the inflation-adjusted rates, you can find Revenue Procedure 2011-52 on the IRS website. This would also be a good opportunity to schedule a meeting with your tax professional to discuss year-end tax strategies to minimize your tax liability to the fullest extent possible.