Every year, Congress and the Internal Revenue Service make changes from mere cost-of-living adjustments (COLAs) to major revamps of tax law. So here is an overview of six of the key federal tax law changes for 2012
- A reminder: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.
1. Tax bracket limits have shifted higher for 2012.
A COLA of just over 3.8% for 2012 leaves federal tax brackets looking like this:
Bracket Single Filers Married Filing Jointly Married Filing Head of Household
or Qualifying Widower Separately
10% Up to $8,700 Up to $17,400 Up to $8,700 Up to $12,400
15% $8,701-$35,350 $17,401-$70,700 $8,701-$35,350 $12,401-$47,350
25% $35,351-$85,650 $70,701-$142,700 $35,351-$71,350 $47,351-$122,300
28% $85,651-$178,650 $142,701-$217,450 $71,351-$108,725 $122,301-$198,050
33% $178,651-$388,350 $217,451-$388,350 $108,726-$194,175 $198,051-$388,350
35% $388,351 or more $388,351 or more $194,176 or more $388,351 or more1
For 2011, the COLA was merely 1.4%. Thanks to the 2012 COLAs, some filers may owe hundreds less in federal taxes because they find themselves in a lower bracket.1,2
2. Personal & dependent exemptions are each worth $100 more.
In 2012, the value of each personal and dependent exemption has increased $100 to $3,800.3
3. Standard deductions are up across the board, increasing from $150 -$300.
For 2012, the IRS standard deductions are as follows:
- Married filing jointly & qualifying widower $11,900 (up $300 from 2011)
- Single filers & married filing separately $ 5,950 (up $150 from 2011)
- Head of household $ 8,700 (up $200 from 2011)3
4. There has been a $500 boost in the annual contribution limit to 401(k)s and certain other qualified retirement plans.
With the $500 2012 COLA, participants in 401(k) plans, 403(b) plans, some 457 plans and the federal government’s Thrift Savings Plan can contribute up to $17,000 to their accounts this year. The catch-up contribution limit for plan participants 50 and older remains $5,500.4
5. The phase-out range for Roth IRA contributions has increased.
The Adjusted Gross Income (AGI) phase-out ranges for 2012 are as follows:
- Married filing jointly & qualifying widower $173,000-$183,000
- Single filers & heads of household $110,000-$125,000
These phase-out ranges are up by $4,000 for married couples filing jointly and $3,000 for singles and heads of household compared to 2011. Married individuals filing separate returns who are covered by a retirement plan at work see no change here – the phase-out range for that category remains $0-$10,000.4
6. The income phase-out range to claim deductions linked to traditional IRA contributions has increased.
This year, the AGI phase-out range looks like this:
- Single filers & heads of household – $58,000-$68,000
- Married filing jointly – $92,000-$112,00 with the taxpayer making the contribution covered by workplace retirement plan
- Married filing jointly – $173,000-$183,000 with the taxpayer making the contribution not covered by workplace retirement plan, yet spouse is covered by one
So that is a $4,000 increase from last year for the last category and a $2,000 increase for everyone else.4
This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Symphony Financial andPeter MontoyaInc. to recipients. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision, Symphony Financial andPeter MontoyaInc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Symphony Financial andPeter MontoyaInc. assume no obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.
Citations.
1 – individual.troweprice.com/public/Retail/Planning-&-Research/Tax-Planning/Prepare-Your-Taxes/Tax-Rate-Schedules [3/14/12]
2 – articles.marketwatch.com/2011-10-20/finance/30775423_1_income-tax-single-filers-standard-deduction [10/20/11]
3 – www.irs.gov/newsroom/article/0,,id=248485,00.html [10/20/11]
4 – www.irs.gov/newsroom/article/0,,id=248482,00.html [10/20/11]
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Investment Advisor Representative. Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Symphony Financial are not affiliated.