Personal Finance Update: Chapter 4, Tax Changes for 2012

As with every year, 2012 begins with a new set of tax rules, and it’s pretty certain that the tax rules will continue to change throughout 2012.  What makes this a certainty is that Congress did not address some of the tax provisions that expired at the end of 2011.   In addition, while Congress extended the 2 percent cut in the employer’s share of the Social Security payroll tax, the extension only lasts for two months.  There is little doubt that this will be extended for all of 2012, but the Democrats and Republicans will do a great deal of bickering as to how to offset the revenue cost before it is passed.  Finally, the Bush tax cuts will expire at the end of 2012, so they will either have to be extended, or tax brackets will change.

To better understand the changes ushered in in 2012, let’s first look at some of the tax provisions that lapsed at the end of 2011, followed by the highlights for 2012.

I.  Lapsed tax breaks that are likely to be reinstated retroactively for 2012 include:

Write-offs taken for state sales taxes, college tuition and up to $250 of teachers’ classroom supplies.  The higher Alternative Minimum Tax or AMT exemptions and the AMT offset for personal tax credits such as tuition and dependent care.

II.  Lapsed tax breaks that may not be reinstated:

The $500 credit for energy efficient home improvements such as storm windows and water heaters.

III.  Tax Change Highlights for 2012

Personal Taxes:  The tax brackets for 2012 did not change from 2011 owing to the fact that the Bush tax cuts were extended through 2012.

Tax Bracket Married Filing Jointly Single
10% Bracket $0 – $17,400 $0 – $8,700
15% Bracket $17,400 – $70,700 $8,700 – $35,350
25% Bracket $70,700 – $142,700 $35,350 – $85,650
28% Bracket $142,700 – $217,450 $85,650 – $178,650
33% Bracket $217,450 – $388,350 $178,650 – $388,350
35% Bracket Over $388,350 Over $388,350

In addition:

  • The personal and dependency exemption is $3,800 for tax year 2012, up $100 from 2011.
  • The standard deduction for married filing jointly will rise to $11,900 for tax year 2012, if one spouse is age 65 or older, it becomes $13,050, if both are 65 or older, it becomes $14,200.
  • The standard deduction for singles will rise to $5,950 for tax year 2012.  If they are 65 and up they can deduct $7,400.
  • Another big change in the area of personal taxes is the decreased Alternative Minimum Tax or AMT exemption, going from $74,500 to $45,000 for a married couple. Single taxpayers and those filing as Head of Household experience an exemption decrease from $48,450 to $33,750.
  • While credit amounts will continue unchanged for 2012, the Modified Adjusted Gross Income or MAGI threshold at which the lifetime learning education credit begins to phase out rises slightly to $104,000 for joint filers and $52,000 for single filers (up from $102,000 and $51,000, respectively).

Social Security: The Social Security wage base for 2012 rises to $110,100, a $3,300 increase from the 2011 base.  As mentioned earlier, the 2% cut in the employer’s share of the Social Security payroll tax is likely to continue for the entire year after some political “bickering.” Social Security benefits will also go up by 3.6% in 2012, which represents the first rise since 2009.  There are also changes (increases) in the Social Security earnings limits.  Individuals who turn 66 in 2012 can now make up to $38,880 before they hit the earnings limit, but younger retirees (62-65 in 2012) lose $1 from their benefits for each $2 they earn above $14,640. There is no earnings cap once a beneficiary turns 66.

Medicare: For 2012, the Medicare Part B premium will be $99.90 per month, which is up from $96.40 (where it has been since 2008).  However, this represents a reduction for seniors who first enrolled in 2010 or 2011.  As before, for upper income seniors, the part B premium is much higher.  Other changes are listed in the 2012 Medicare & You Handbook.

Retirement Plans: There are also changes made to the retirement savings plans.  For 2012 the maximum 401(k) contribution is $17,000, which represents a $500 increase over the maximum in 2011 (for individuals born before 1963 it is $22,500). The 2012 contribution limits are the same for 403(b) and 457 plans. The contribution limit on SIMPLEs remains at $11,500, and individuals age 50 or older in 2012 can contribute an additional $2,500.

The income ceilings for contributions to Roth IRAs also rise, with contributions phasing out at Adjusted Gross Incomes or AGIs of $173,000 to $183,000 for couples and $110,000 to $125,000 for singles.  In addition, the deduction phase-outs for regular IRAs begin at $92,000 of AGI and is completed at $112,000 for couples and from $58,000 to $68,000 for singles.

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