Inflation-Related Tax Law Changes for 2012
For the 2012 tax year, many taxpayers will benefit from inflation-based adjustments to various deductions, exemptions, credits and thresholds. By law, the Internal Revenue Service must make these adjustments based on the inflation rate. While not every amount is changed every year, there are always some adjustments. A number of changes went into effect in 2012. The net effect is essentially a tax cut for the taxpayers who are affected.
All taxpayers enjoy an exemption for themselves and any dependents. For 2012, this exemption rises to $3,800, $100 more than 2011. For the bulk of taxpayers, who don't itemize deductions, the standard deduction rises to $11,900 for joint filers, $8,700 for heads of household and $5,950 for single filers and married taxpayers filing separately. These amounts rise $300, $200 and $150, respectively. Taxpayers using the foreign income deduction will see a rise to $95,100, up $2,200 from 2011.
The earned income tax credit (EITC) is an important tax benefit for low- and middle-income taxpayers, particularly those with dependent children. For 2012, the maximum credit rises from $5,751 to $5,891. For purposes of qualifying for the EITC, the maximum income rises to $50,270, up from the 2011 maximum of $49,078.
The phase-out of the lifetime learning credit begins at a modified adjusted gross income of $104,000 for joint filers, a rise from 2011's $102,000 limit. For singles and heads of household, the limit goes from $51,000 to $52,000.
For joint filers, phase-out limits for the deduction on student loan interest rise $5,000 from 2011, with the deduction phasing out at $125,000 and vanishing completely at $155,000. There is no change for single filers for 2012.
All tax brackets benefit from a widening in 2012, thanks to the IRS inflation adjustments. Tax rates remain the same, with brackets at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. The largest bracket adjustment applies to the threshold of the 35 percent bracket for joint filers, which sees a rise of $9,200 to $388,350. Middle-income taxpayers see a more modest increase, with the bracket dividing the 15 percent and 25 percent bracket for joint filers rising from $69,000 in 2011 to $70,700 in 2012.
Wealthy taxpayers see a rise in the amount that can be left to heirs without paying estate tax for 2012, up to $5.12 million from $5 million in 2011. However, the annual gift tax exclusion remains unchanged, at $13,000.
A 2012 inflation adjustment comes into play for estate executors choosing the special use valuation for qualified real property. Essentially, the special use valuation allows an executor to assign a property a lower value -- and consequently a lower estate tax liability -- if its "special use" lowers its value below what would otherwise be fair market value. For 2012, executors can lower the value of property in this manner by up to $1.04 million, up $20,000 from 2011.