Tax Changes for 2012

Mandatory annual inflation adjustments generally affect federal income tax brackets, retirement plan contribution limits, and exemption levels from year to year.

The 3.8% inflation rate (measured by the Consumer Price Index) used to index 2012 tax rates is higher than it was in the previous two years; the adjustments could lower your tax bill on your 2012 return (due in April 2013). Here are some changes that may affect you and your family.

• Personal and dependent deduction: $3,800 (up $100).
• Standard deduction: $5,950 for single filers and married couples filing separately (up $150); $11,900 for married couples filing jointly (up $300). According to the IRS, almost two out of three taxpayers take the standard deduction rather than itemizing.
• Higher-education credit income thresholds [modified adjusted gross income (AGI)]: Phaseouts start at $52,000 (single filers) and $104,000 (joint filers) for the Lifetime Learning Credit; $80,000 (single filers) and $160,000 (joint filers) for the American Opportunity Tax Credit (formerly the Hope Scholarship Credit).
• Federal estate tax exemption: $5,120,000 (up $120,000). The annual gift tax exclusion ($13,000) did not change.*

Retirement Contribution Limits

The annual employee contribution limit for employer-sponsored retirement plans (401k, 403b, 457 plans) increased from $16,500 to $17,000 — the first increase since 2009. However, the catch-up contribution for those aged 50 and older remains unchanged at $5,500.

The income phaseout limit for deducting contributions to traditional IRAs (for active participants in employer-sponsored retirement plans) rose to $58,000 AGI ($92,000 for joint filers), an increase of $2,000 over 2011. Roth IRA eligibility phaseout limits rose to $110,000 AGI ($173,000 for joint filers), up slightly from 2011.

For additional information on 2012 changes, visit www.irs.gov. Of course, before you take any specific action, be sure to consult with your tax professional.

*The federal estate tax exemption is scheduled to fall to $1 million in 2013, unless Congress changes the current tax law.

Sources: Internal Revenue Service, 2011; CCH, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax advice from an independent professional Naperville Accountant. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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