A guide to 2012 tax law changesArticle added by Jason Kestler on April 18, 2012
Jason Kestler

Jason Kestler

Leesburg, VA

Joined: August 15, 2009

(continued)
Every year, Congress and the Internal Revenue Service make changes from mere cost-of-living adjustments (COLAs) to major revamps of tax law. Here is an overview of the key federal tax law changes for 2012, some key tax breaks that left us at the end of 2011 and some tax changes on the horizon for 2013.
    A reminder: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.
Let’s begin with a look at the 2012 changes all taxpayers should know about.

Tax bracket limits have shifted higher for 2012

A COLA of just over 3.8 percent for 2012 leaves federal tax brackets looking like this:

BracketSingle FilersMarried Filing Jointly or Qualifying Widower
10%Up to $8,700 Up to $17,400
15% $8,701-$35,350 $17,401-$70,700
25%$35,351-$85,650 $70,701-$142,700
28%$85,651-$178,650$142,701-$217,450
33% $178,651-$388,350$217,451-$388,350
35% $388,351 or more $388,351 or more


BracketMarried Filing Separately Head of Household
10% Up to $8,700Up to $12,400
15%$8,701-$35,350$12,401-$47,350
25%$35,351-$71,350 $47,351-$122,300
28%$71,351-$108,725$122,301-$198,050
33%$108,726-$194,175 $198,051-$388,350
35%$194,176 or more $388,351 or more1


For 2011, the COLA was merely 1.4 percent. Thanks to the 2012 COLAs, some filers may owe hundreds less in federal taxes because they find themselves in a lower bracket.1,2

Personal and dependent exemptions are each worth $100 more

In 2012, the value of each personal and dependent exemption has increased $100 to $3,800.3

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

For 2012, the IRS standard deductions are as follows:
  • Married filing jointly and qualifying widower: $11,900 (up $300 from 2011)
  • Single filers and married filing separately: $ 5,950 (up $150 from 2011)
  • Head of household: $ 8,700 (up $200 from 2011)3
There has been a $500 boost in the annual contribution 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 $5,500.4
The phase-out range for Roth IRA contributions has increased

The Adjusted Gross Income phase-out ranges for 2012 are as follows:
  • Married filing jointly and qualifying widower: $173,000-$183,000
  • Single filers and 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-$10,000.4

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 making the contribution covered by workplace retirement plan: $92,000-$112,000
  • Married filing jointly with the taxpayer making the contribution not covered by workplace retirement plan, yet spouse is covered by one: $173,000-$183,000
So that is a $4,000 increase from last year for the last category and a $2,000 increase for everyone else.4

The basic estate tax exclusion is slightly higher this year

It got a COLA as well, rising to $5.12 million from $5 million in 2011. Should the executor of an estate elect to use the special use valuation method for qualified real property, there is a slightly higher allowance on the aggregate decrease in property value resulting from the choice — $1.04 million in 2012, up from $1.02 million in 2011.3

Incidentally, the annual gift tax exclusion per recipient remains at $13,000 for 2012.3

Phase-outs kick in at slightly higher modified adjusted gross income levels for the Lifetime Learning Credit 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 and qualifying widower: $104,000 (up $2,000 from 2011)
  • Single filers and 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 from 2011:
  • Married filing jointly and qualifying widower: $125,000-$155,000
  • Single filers and heads of household: $60,000-$75,0002,3


Deductibles on Archer MSAs have increased

For 2012, the annual deductible amounts have the following limits:

Self-only coverageFamily coverage
Min. annual deductible$2,100$4,200
Max. annual deductible $3,150$6,300
Max. annual out-of-pocket expenses$4,200 $7,6503
The AGI ceiling for the savers’ credit has risen

It may be easier for certain taxpayers to qualify for the retirement savings contribution credit in 2012. With this year’s COLAs, the limits are set as follows:
  • Married filing jointly and qualifying widower: $57,500 (up $1,000 from 2011)
  • Single filers and married filing separately: $28,750 (up $500 from 2011)
  • Head of household: $43,125 (up $750 from 2011)4
The AMT is not going away — not yet

You may have read that President Obama wants to kill the alternative minimum tax and replace it with a so-called Buffett Rule — a simple yardstick that would impose a 30 percent income tax floor for taxpayers making more than $1 million annually. All true — but if that happens, it happens after 2012. (The proposal is in the White House’s 2013 budget draft.)

For the moment, we await another AMT patch from Congress. If somehow there is no patch by the end of 2012, the AMT exemption levels for this tax year would revert to:
  • Married filing jointly and qualifying widower: $45,000
  • Married filing separately: $22,250
  • Single filers: $33,7505,6
As this would be undesirable for both politicians and working-class taxpayers, expect a patch. Phase-outs apply for higher-income taxpayers when it comes to the alternative minimum tax exemption. If you are subject to the AMT, the present AMT tax rates are 26 percent and 28 percent.

You may be wondering about the “kiddie tax.” Well, 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 2012.7,8

The foreign earned income deduction is larger

The maximum deduction was $92,900 in 2011; for tax year 2012, the maximum is $95,100.3

The payroll tax holiday has been extended for the entire year

This isn’t a change, but it is certainly worth noting. As you may have heard, Congress and the president acted in late February to preserve the payroll tax cut for the rest of the year — so for 2012, the employee portion of Social Security tax is set at 4.2 percent and self-employed Social Security tax is set at 10.4 percent. The Social Security taxable wage base increases to $110,100 for 2012.8,9

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 2011.8

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.8

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 $200,000.8
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.8

The Section 179 business equipment deduction has plummeted

In 2011, this deduction was $500,000 with phase-outs starting at $2 million. This year, the deduction is but $139,000 with the phase-outs coming at $560,000.8

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 and carpooling/vanpooling is now limited to $125 per month. Last year, it was $230 per month.8

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 consultant your tax advisor. SmartMoney.com has a useful nanny tax calculator: www.smartmoney.com/personal-finance/taxes/the-nanny-tax-9560/

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 2012.10

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 2012.8

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 2012.11
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 1040A or Worksheet 34-1 in IRS Publication 915.
EITC exemption amounts have risen

In 2012, the federal earned income tax credit 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.2

Notable things gone from the 2012 tax code

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.6,12

Residential energy credit

The $500 lifetime credit allowed on 10% of the cost of qualified purchases of energy-efficient home improvement materials and services is now extinct.6,12

Educator expenses deduction

In 2011, a classroom educator could deduct up to $250 of the cost of school supplies used in class. No more.12

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).12

Here some notable changes scheduled for 2013 (barring some late-inning interventions on the part of Congress).

The top tax rate resets to 39.6 percent

With the presumed sunset of the Bush-era tax cuts at the end of 2012, the highest tax bracket will return to its pre-EGTRRA/JGTRRA level.12

The 3.8 percent health care tax hits in 2013

A new 3.8 percent surtax will be assessed on certain net investment income of individuals with modified adjusted gross income of more than $200,000 annually or married couples with MAGI in excess of $250,000 annually.12
A 20 percent capital gains tax

The 0 percent and 15 percent brackets that middle-income taxpayers have gotten used to will vanish, replaced by a 10 percent rate on long-term capital gains for taxpayers in the 15 percent tax bracket and 20 percent for everyone else.12

Qualifying dividends will be taxed as ordinary income

This will be a real shock for those in the highest tax brackets, as they are currently taxed at 15 percent.12

The phase-out on the personal exemption returns

Remember this? Briefly absent, it is scheduled for a comeback next year.12

Payroll taxes will return to the 6.2 percent level

The payroll tax holiday for workers is slated to end at the end of 2012 … though some legislators would like to make the present 4.2 percent rate permanent.12

The Pease limit comes back

A couple of years ago, the IRS decided to throw out the limitation of itemized deductions (or the Pease limit, referencing the Congressman who sponsored the legislation a generation ago). In 2013, deductions will be limited once more for married taxpayers filing jointly with annual incomes of more than $169,750.12

No more American Opportunity Tax Credit

Unless Congress and the president act, the up-to-$2,500-per-student tax break will be gone come 2013.12

Annual FSA spending limits will be halved

Currently, the yearly limit on flexible spending accounts is capped at $5,000; in 2013, it is scheduled to fall to $2,500.12

This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Kestler Financial and Peter Montoya Inc. to recipients. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision, and Kestler Financial and Peter Montoya Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Kestler Financial and Peter Montoya Inc. assume no obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.

Citations

1 - individual.troweprice.com/public/Retail/Planning-&-Research/Tax-Planning/Prepare-Your-Taxes/Tax-Rate-Schedules [3/14/12]
2 - articles.marketwatch.com/2011-10-20/finance/30775423_1_income-tax-single-filers-standard-deduction [10/20/11]
3 - www.irs.gov/newsroom/article/0,,id=248485,00.html [10/20/11]
4 - www.irs.gov/newsroom/article/0,,id=248482,00.html [10/20/11]
5 - articles.latimes.com/print/2012/feb/15/business/la-fi-amt-budget-20120215 [2/15/12]
6 - www.mainstreet.com/slideshow/moneyinvesting/taxes/9-tax-breaks-set-expire-weekend [12/30/11]
7 - www.hrblock.com/taxes/tax_calculators/rate_tables/amt.html [3/14/12]
8 - www.badermartin.com/blog/3358/high-net-worth/wondering-about-the-new-federal-tax-deductions-and-limits-for-2012/ [11/10/11]
9 - tax.cchgroup.com/downloads/files/pdfs/legislation/payroll-extension2012.pdf [2/22/12]
10 - www.smartmoney.com/personal-finance/taxes/the-nanny-tax-9560 [1/14/11]
11 - www.ssa.gov/pressoffice/factsheets/colafacts2012.htm [12/27/11]
12 - www.advisorone.com/2012/03/08/14-big-changes-for-tax-years-2011-13-tax-expert-be [3/8/12]
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