2012 Tax Benefits and Inflation Adjustments

Each year many tax benefits increase due to inflation adjustments.  JoeTaxpayer tells us more about these adjustments for 2012.

Income

The value of personal exemptions increases to $3,800 per person and the standard deduction also rises to $5,950 for singles and $11,900 for married couples filing joint returns. Just over 2/3 of taxpayers take the standard deduction, so these year over year increases, however slight, are still important. The tax brackets (10%,15%,25%, 28%, 33%, 35%) remain unchanged, but the transition from one to the next shifts up slightly. For example, the single earner will see the 25% rate start at a taxable $35,350 in 2012 versus $34,500 in 2011. A bit of savings due to inflation adjusted brackets.

Inflation adjustment

Inflation adjustment

The “Kiddie Tax” remains unchanged. A child with unearned income of up to $1900 may be able to take a $950 standard deduction and they will be taxed at the 10% tax rate. Income beyond that may be taxed at the parents’ rate.

Retirement Savings

Contribution limits rose for 401(k), 403(b), and 457 plans as well as the Thrift Savings Plan. The new limit in 2012 is $17,000 plus an extra $5,500 if you are 50 or older by the end of the year. The IRA limit remains at $5,000 or $6,000 if 50 or older.

Deductions

The HSA (Health Savings Account) contribution limit has increased to $3,100 for individuals and $6,250 for families. An additional $1,000 is available for those 55 and older.

There are no changes this year to the Dependent Care Account.  There is a $5,000 limit for money you and your spouse can withhold pre-tax to pay child care expenses for your child under age 13.

Flexible Spending Accounts will also see no change in 2012. This is pretax money you have withheld in order to pay for medical needs, including co-pays or prescriptions not covered by your plan. There is currently no limit, although most employers have a $5000 maximum permitted. If you have been debating about getting any elective medical procedures you may want to make the most of your flexible spending account in 2012 since the rules will change in 2013 and the maximum you will be able to contribute to an FSA will be limited to $2,500 per year.

Credits

In 2012 the Adoption Tax Credit decreases to $12,650. Also note, in 2011, it was refundable, meaning you’d get it if you qualified, regardless of your total tax bill. In 2012, the tax credit can not create a negative tax bill, it can only offset your taxes due for the year.

Child Tax Credit – In 2012 you can still take advantage of this tax credit and reduce your tax liability by up to $1,000 for each qualifying child under 17.  The Child Tax Credit is scheduled to expire at the end of 2012.  If the same tax credit is not extended after 2012, the Child Tax Credit may decrease to $500 in 2013.

Earned Income Tax Credit – This tax credit increased to a maximum $5,891 in 2012, up $140 from last year. The maximum income to receive any of this credit is $50,270, and the credit itself is based on both income and number of dependents in your family. Note – Your investment income must be under $3,200 to qualify for this credit so plan accordingly.

The Saver’s Credit – This is a credit up to $2000 for couples and $1000 if you’re single. To qualify, a couple may have an income of up to $28,750 for a single filer, and $57,500 for married filing jointly. This credit is based on both income and your deposit to a retirement account. It’s also impacted by other deductions and credits, so it’s best to let TurboTax show you what credit, if any you’re eligible for.

Estate Tax

The estate tax top rate will stay at 35%, with the exemption rising to $5,120,000 until the end of 2012.

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