The rate of inflation is factored into the Internal Revenue Service tax forms on an annual basis. Forward-thinking taxpayers can review the IRS tax changes when it releases its adjustments for 2012 in early November.
Here is a preview of some of the tax agency rules that affect how taxpayers will file next year’s taxes.
For 2011, the dependent and personal exemption applicable to many taxpayers is $3,700. Each exemption will rise to $3,800 in the 2012 tax year. More than 60 percent of taxpayers chooses a standard deduction. Just over one-third of taxpayers files by itemizing deductions.
The IRS is increasing some standard deductions, including a $300 uptick for married couples filing jointly to $11,900 for the 2012 tax year. Those who file as single or who are married but file separately currently have a $5,800 standard deduction that will rise to $5,950 for 2012. Heads of household may claim a 2012 standard deduction of $8,700, a $200 improvement over 2011.
Tax brackets have also been altered to reflect inflationary changes. In 2011, a married couple filing jointly falls into the 15 percent tax bracket as long as their combined income does not go above $69,000. For 2012, couples may earn an additional $1,700, up to $70,700, before being bumped up to a 25 percent tax bracket.
More money can be stashed into retirement accounts in 2012. The IRS will allow 401(k) contributions of up to $17,000 next year for under-50 taxpayers. For older investors, the annual contribution limit rises to $22,500.
Asset giving for estate planning purposes will also expand next tax year with an increase from a lifetime tax-free $5 million limit up to $5.12 million. Yearly maximum limits for gift-giving tax exclusions of $13,000 will not change.
The IRS has also increased limits for earned income tax credits and foreign earned income, among several other changes it will make available to the public in detail in November in Internal Revenue Bulletin 2011-45.
Source: Financial Planning, “IRS Ups 401(k) Contribution Limits by $500 to $17K,” Michael Cohn, Oct. 25, 2011