Adjusted Tax Rates for 2012

Inflation Adjusted Tax Rates for 2012

Each year, income tax rates are tweaked a little. Though getting tax legislation through Congress is like pulling hen’s teeth (as a metaphor-mixing friend of mine used to say), this tweaking happens without Congressional intervention. That’s because years ago Congress had the foresight to build inflation adjustments into the tax law, so each year rates and exemptions are changed automatically.

At this time last year, we didn’t know what the new rates would be, since the Bush era tax cuts were expiring and Congress was locked in a battle over what to do. Finally the powers-that-be compromised on an extension of the tax cuts to the end of 2012. So next year we’ll be back in the maelstrom, wondering what the new rates will be, with the fate of the tax rates in the hands of a post-election lame-duck Congress.

But this year the only change in the rates is an adjustment for inflation, so 2012 rates will be similar to 2011.  Here are a few of the changes between 2011 and 2012 taxes:

  • Tax-bracket thresholds will increase slightly for each filing status (single, married, married filing separately and head of household).  That increase works to your benefit, lowering taxes just a smidge.  For example, if you are single, in 2012 your tax bracket increases from 15% to 25% for taxable income over $35,351, up from $34,500 in 2011. As a result, in 2012 you’ll pay tax at the lower 15% bracket (rather than 25%) on the $851 of income that falls between those figures.  That’s a whopping savings of $85 a year.
  • The personal and dependent exemption will be $3,800 in 2012, up from $3,700 in 2011. If you are in a 25% tax bracket, that $100 increase in the exemption will save you $25 a year for each exemption you can claim.
  • About two-thirds of taxpayers claim the standard deduction rather than itemizing deductions. The new 2012 standard deduction will be $11,900 for married couples, $8,700 for heads of household and $5,950 for singles and married people filing separately. That’s an increase of $300 for married couples, $200 for heads of household, and $150 for singles and married folks filing separately.  For a single person in a 25% tax bracket, that translates to annual savings of $37.50.
  • The additional standard deduction for the blind and senior citizens remains unchanged at $1,150 for married individuals and $1,450 for singles and heads of household.

Other changes that might affect you include:

  • The 401(k) contribution limits have increased by $500, from $16,500 to $17,000. Employees who are 50 or older can contribute another $5,500.
  • IRA contribution limitations continue to be $5,000 a year in 2012, with an additional $1000 catchup payment allowed each year for those 50 and older.
  • Estates exceeding $5.12 million will be subject to estate taxes, up from $5 million in 2011.  I don’t know about you, but the old $5 million was plenty high for me. Stay tuned for developments in this area, since this tax exemptions is set to revert to $1 million at the end of 2012 unless Congress acts.
  • The annual gift tax exclusion remains at $13,000 in 2012.  That is the amount you can give away to any person during the year without filing a gift tax return.
  • The American Opportunity Credit, which provides college students and their parents up to $2,500 per student per year for four years, will continue unchanged until the end of 2012.


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