Inflation changes may trim your 2012 tax bill

Thanks to the rising cost of living, federal income-tax bracket limits will jump higher in 2012, as will the standard deduction and exemption amounts, and the maximum amount taxpayers are allowed to contribute to their workplace retirement plans, according to the IRS.

All else being equal, the changes lower your tax bill. For instance, when tax bracket limits shift higher, more of your income is counted in, say, the 15% bracket rather than the 25% bracket. The higher your income, the more savings you realize, as more of your money is shifted into lower tax brackets.

The changes will affect taxpayers’ 2012 returns, due in April 2013. And they’re more noticeable than recent years.

“The formula used in indexing showed a relatively higher amount of inflation this year over last, just over 3.8%,” according to CCH Inc., a Riverwoods, Ill.-based tax publisher and unit of Wolters Kluwer, in a press release in September, in which they estimated the inflation-related changes.
“This increase is well above the 1.4% amount used last year, and far greater in comparison to the 0.18% inflation factor used to set 2010 tax amounts,” CCH said, based on its calculations in September. “Although so-called ‘rounding conventions’ keep some tax amounts for 2012 the same as they are for 2011, such as the $13,000 gift tax annual exclusion, most 2012 figures will move higher.”

A married couple filing jointly with taxable income of $100,000 in 2012 would pay $190 less in income tax, compared with 2011, because of the tax-bracket changes, according to CCH. A couple filing jointly with taxable income of $450,000 in 2012 will pay $732 less in income tax.

Since the late 1980s, the tax code has required inflation adjustments for federal income-tax brackets. And currently it requires cost-of-living adjustments for more than 50 tax provisions, CCH said.

Here are some of the changes coming to your 2012 taxes:

•Tax-bracket thresholds will rise. For example, for a married-filing-jointly couple, the 25% bracket will kick in at $70,700, up from $69,000 this year. For single filers, the 25% bracket will start at $35,350, up from $34,500 in 2011.

•The personal and dependent exemption will increase to $3,800, from $3,700 in 2011.

•The standard deduction for married-filing-jointly couples will jump to $11,900, a $300 increase, and for single filers and couples who file separately it will rise $150 to $5,950. For head-of-household filers, the standard deduction will increase $200 to $8,700. About two out of three taxpayers claim the standard deduction, the IRS said.

•The foreign earned-income deduction will rise to $95,100, up $2,200 from the maximum deduction in 2011.

•The maximum earned income tax credit or EITC will rise to $5,891, from $5,751 in 2011 — the credit varies by family size and other factors, with that maximum amount available to working families with three or more qualifying children — and the maximum income limit to claim the credit will increase to $50,270 from $49,078 in 2011.

•The estate tax exclusion will rise to $5.12 million in 2012, from $5 million, but the annual gift tax exclusion will remain $13,000.

Some tax perks phase out for taxpayers at certain income levels, but for at least two college-related tax breaks, inflation adjustments will increase those income limits. For taxpayers who claim the lifetime learning credit, the income phase-out rises to $104,000 for married-filing-jointly taxpayers, up from $102,000 in 2011, and to $52,000 for single filers and heads of household, up from $51,000.

Read more here: http://www.marketwatch.com/story/irs-inflation-changes-may-trim-your-2012-tax-bill-2011-10-20