2012 Tax Law Highlights

Tax bracket limits have shifted higher for 2012 and A COLA of just over 3.8% for 2012 leaves federal tax brackets looking like the ones found in this post.

Personal & dependent exemptions are each worth $100 more.  In 2012, the value of each personal and dependent exemption has increased $100 to $3,800. 

Standard deductions are up across the board, increasing from $150 -$300.

  • Married filing jointly & qualifying widower $11,900 (up $300 from 2011)
  • Single filers & married filing separately $ 5,950 (up $150 from 2011)
  • Head of household $ 8,700 (up $200 from 2011)

There has been a $500 boost in the annual contributions on limit to 401(k)s and certain other qualified retirement plans.  With the $500 2012 COLA, participants in 401(k) plans, 403(b) plans, some 457 plans and the federal Government’s Thrift Savings Plan can contribute up to $17,000 to their accounts this year. The catch-up contribution limit for plan participants 50 and older remains at $5,500.

The phase-out range for Roth IRA contributions has increased.  The Adjusted Gross Income (AGI) phase-out ranges for 2012 are as follows:

  • Married filing jointly & qualifying widower $173,000-$183,000
  • Single filers & heads of household $110,000-$125,000

These phase-out ranges are up by $4,000 for married couples filing jointly and $3,000 for singles and Heads of household compared to 2011. Married individuals filing separate returns who are covered by a Retirement plan at work see no change here – the phase-out range for that category remains $0-$10,000.

The income phase-out range to claim deductions linked to traditional IRA contributions has increased.  This year, the AGI phase-out range looks like this:

  • Single filers & heads of household $58,000-$68,000
  • Married filing jointly with the taxpayer $92,000-$112,000 making the contribution covered by  workplace retirement plan
  • Married filing jointly with the taxpayer $173,000-$183,000 making the contribution not covered by workplace retirement plan, yet spouse is covered by one

Phase-outs kick in at slightly higher Modified Adjusted Gross Income levels for the Lifetime Learning Credit (LLC) and for the deduction for interest paid on student loans.

The phase-out trigger for the LLC has increased to reflect inflation: 

  • Married filing jointly & qualifying widower $104,000 (up $2,000 from 2011)
  • Single filers & heads of household $52,000 (up $1,000 from 2011)

The maximum above-the-line deduction for interest paid on student loans is $2,500 in 2012. This year, the phase-out range has been set $5,000 higher for joint filers only. For single filers, the phase-out range is unchanged.

  • Married filing jointly & qualifying widower $125,000-$155,000
  • Single filers & heads of household $60,000-$75,000

 Deductibles on Archer MSAs have increased. For 2012, the annual deductible amounts have the following limits:

                                                              Self-only coverage    Family coverage

Min.  annual deductible                                   $2,100                         $4,200
Max. annual deductible                                    $3,150                         $6,300
Max. annual out-of-pocket expenses             $4,200                         $7,650

Kiddie Tax.  The exemption for an under-age-19 child subject to the kiddie tax is currently $6,800, and the net unearned income not subject to the kiddie tax is still $1,900 in 2012.

The payroll tax holiday has been extended for the entire year.  In 2012, the employee portion of Social Security tax is set at 4.2% and self-employed Social Security tax is set at 10.4%. The Social Security taxable wage base increases to $110,100 for 2012.

Compensation limits pertaining to qualified retirement plans have risen.  In 2012, the maximum compensation used to determine contributions to qualified retirement plans is $250,000, up from $245,000 in 2011.

The highly compensated employee threshold is now $115,000 rather than $110,000. The maximum compensation defining a key employee in a top-heavy plan is $165,000 in 2012, up from $160,000 last year.

The maximum annual addition for a defined contribution plan is up $1,000 this year to $50,000. The maximum annual benefit for a defined benefit plan is up $5,000 for 2012 to $200,000.

Two standard mileage rates change this year.  In 2012, the standard mileage rate for business mileage remains at $0.555 per mile. The rate for medical and moving mileage decreases to $0.23 a mile. The rate for charitable mileage remains at $0.14 a mile.

The Section 179 business equipment deduction has plummeted.  In 2011, this deduction on was $500,000 with phase-outs starting at $2 million. This year, the deduction is but $139,000 with the phase-outs coming at $560,000.

IRS tax breaks for commuting have been adjusted this year.  The qualified parking deduction is $240 a month in 2012, up from $230 a month in 2011. The deduction for transit passes & carpooling/vanpooling is now limited to $125 per month. Last year, it was $230 per month.

The “nanny tax” exemption amount is now $1,800. That is an increase from $1,700 in 2011. If you pay a maid, au pair, or other domestic employee more than $1,800 this year, you are defined as an employer by the IRS. You are looking at the “nanny tax” and you should read IRS Publication 926 (the Household Employer’s Tax Guide) and consult your tax advisor.

If your nanny, maid or domestic employee was actually your spouse or your parent, a child of yours younger than 21, or a minor whose principal occupation is not domestic employment, you aren’t subject to such taxes even if you pay that person more than $1,800 for their services in 2012.

The lifetime gift tax exclusion has been raised to $5.12 million.  As the lifetime gift and estate tax exemptions are unified, COLAs that happen to one happen to the other. Hence the increase for 2012. 

The earnings limits for Social Security recipients younger than the full retirement age have risen slightly.

  • The earnings limit for workers younger than full retirement age (which is age 66 if you were born in the period from 1943-1954) is $14,640, a $480 increase from 2011. The Social Security  Administration  (SSA) will deduct $1 from your benefits for each $2 you earn past $14,640.
  • The earnings limit for workers turning 66 in 2012 will be $38,880, up $1,200 from last year. The SSA will deduct $1 from your benefits for each $3 earned over $38,880 until the month that you turn age 66.
  • There is no limit on earnings for workers who will be full retirement age or older for all of 2012.

As for being taxed on your Social Security benefits, you can figure out if you might be subject to such taxes by using the Social Security Benefits Worksheet in the instruction booklets for IRS Form 1040 and Form IRS Publication 915.

EITC exemption amounts have risen. In 2012, the federal earned income tax credit (EITC) for low- and moderate-income workers and working families maxes out at $5,891 (a $140 boost). The maximum income limit to qualify for the EITC is $50,270 for 2012, up from $49,078 in 2011. Joint filers with three or more qualifying children will get the maximum EITC.

Here are some notable things gone from the tax code in 2012 (who knows if these expired items will make a comeback): 

Charitable IRA gifts. Non-profits and colleges loved them, and they were useful to wealthy IRA owners over age 70½ with charitable inclinations – with a trustee-to-trustee transfer, the IRA owner could reduce his or her total income and possibly income tax with a gift of up to $100,000. Some members of Congress would like to make the charitable IRA rollover a permanent option. For 2012, it isn’t available.

Residential energy credit. The $500 lifetime credit allowed on 10% of the cost of qualified purchases of energy-efficient home improvement materials and services are now extinct.  

Educator expenses deduction. In 2011, a classroom educator could deduct up to $250 of the cost of school supplies used in class. No more. 

State sales tax deduction. It was nice to have the choice of whether to deduct state sales tax or state income tax; for 2012, the choice is gone (in states applicable).

2012 Federal Income Tax Rates

The tax rate schedules shown below are provided so you can see the tax rate that applies to all levels of taxable income for tax year 2012.  For detailed tax rates, please refer to this IRS tax table booklet.

 

2012 Rates