Tax Changes You Need to Know for 2012

While much is written about the length and complexity of the U.S. Tax Code, the fact is that much of it doesn't apply to the average taxpayer. In reality, taxes can be relatively straightforward for many individuals.

However, you should be on the lookout for the various tax changes that inevitably occur from year to year. These can range from minor adjustments to the complete elimination of various tax provisions. The Internal Revenue Service has released information on a number of tax changes for the 2012 tax year. (Don’t worry. When you use TurboTax, you’ll always be up-to-date with the latest tax laws.)

Inflation increases the cost of goods and services for consumers. To ensure that American taxpayers keep pace with the rising costs of inflation, the IRS periodically adjusts the value of certain deductions and exemptions. With rising deductions and exemptions, you get to protect more of your money from becoming taxable income.

For tax year 2012, the IRS increased the value of a number of different tax benefits, including:

• Personal and dependent exemptions rise to $3,800
• The standard deduction rises to $11,900 for married taxpayers filing jointly, $8,700 for heads of household and $5,950 for singles and married taxpayers filing separately
• Tax bracket thresholds rise across tax brackets
• The maximum earned income tax credit rises to $5,891
• The maximum income limit for the EITC rises to $50,270
• The foreign earned income deduction rises to $95,100
• The lifetime learning credit begins to phase out at $104,000 in adjusted gross income for joint filers, $52,000 for singles and heads of household
• Annual deductible amounts for Medical Savings Accounts increase for families and individuals.
• The maximum deduction for interest paid on student loans begins phasing out at $125,000 and phases out completely at $155,000 for joint filers; no adjustment is made for single filers
• The estate and gift tax exclusion rises to $5.12 million

According to Jeff Gonzalez, a CPA and the CFO of Los Angeles-based Electric Entertainment, "Inflation adjustments can be a big thing. They don't come every year, but when they do, they translate into additional money in your pocket."

One of the tax buzzwords for 2012 is "offshore accounts," as the IRS has begun taking a closer look at the foreign holdings of American citizens. During the transitional tax year of 2011, only certain taxpayers had to make foreign disclosures to the IRS. As of 2012, all taxpayers who meet the minimum threshold, which varies by tax-filing and residence status, must comply.

"If your overseas assets don't exceed $50,000, you don't have to worry about the new rules," says Gonzalez. "Above that amount, check the IRS reporting limits, which may change from year to year in the future."

For U.S. residents, you have to file information about your foreign holdings if they exceed $50,000 at year-end, if you're a single filer. Foreign holdings exceeding $75,000 at any time during the year must also be reported. For joint filers, the limits rise to $150,000 at any time, and $75,000 at year-end.

For U.S. citizens living abroad, the reporting limits rise dramatically. Single filers need only report accounts exceeding $200,000 at year-end, or $300,000 at any point during the year. For joint filers, the limits are $400,000 at year-end, or $600,000 at any time during the year.

The above requirements for filing Form 8938 do not take the place of the obligation to file an FBAR (Foreign Bank Account Report, Treasury Form TD F 90-22.1) to report a financial interest in or signature authority over a foreign financial account.