This post mostly deals with 2012 tax deductions, changes and exemptions for planning purposes, which means most of the changes described here will be effective for the 2012 tax year, for which you will file the return on April 15, 2013. The 2011 tax guide (a complete 2011 tax guide in pdf) will be released on Feb 12. For 2011 tax changes check this post – 2011 tax changes, deductions and exemptions.
2012 will be a year of guesses. There are several provisions that expire in 2011. The major one is the payroll tax holiday. After weeks of deliberation, back & forth between Senate & Congress, on December 22nd President Obama signed into law a two month extension of the payroll tax cut. The Payroll Tax Holiday was extended to February 29 and will revert back to 6.2% up to the 2012 FICA limit ($110,100 in 2012) unless extended again before that time.
This is not the only change that will affect us in 2012/2013. Ha! I wish taxes were that easy. As I mentioned there are several tax provisions that are expire for the 2012 tax year. If any of them are extended or anything changes retroactively I will write about it.
Several of the Bush tax cuts will also expire in the 2012 tax year. With 2012 being the election year, we can be sure that taxes will be an active participant.
But as for now, this is how it stands. (I am not a tax professional and I am not qualified to give tax advice. This post is based on what I understand. Please consult a tax professional if you have any questions.)
2012 Individual Income Tax Rates
- Tax brackets for 2012 : Based on the existing law, the federal income tax rates will remain unchanged for 2012.
|Marginal Tax Rates||Single||Married filing jointly||Head of Household||Married filing separately|
- Standard Deduction for 2012 :
- $5,950 for unmarried taxpayers or married taxpayers filing separately
- $11,900 for married taxpayers filing jointly
- $8,700 for taxpayers filing as head of household.
- Personal Exemption for 2012: The personal exemption amount will be $3,800 ($150 increase from the 2011 amount $3,650). There is no phase-out for personal exemption, regardless of your income level. Last year’s legislation extended the repeal of phase-out through 2012. If it is not extended again, the phase out will return in 2013.
- Individual retirement plans and 401k contribution limits :
|Retirement Plan||Contribution Limit||Catch up contribution (Above 50yrs)|
- 2012 Traditional IRA AGI Deduction Limits (If Covered by a Retirement Plan at Work)
|Filing Status||Full Deduction||Phase Out||No Deduction|
|Single, head of household||$58,000 or less||$58,000 – $68,000||$68,000 or more|
|Married filing jointly||$92,000 or less||$92,000 – $112,000||$112,000 or more|
|Married filing separately||Less than $10,000||$10,000 or more|
- 2012 Traditional IRA AGI Deduction Limits (If NOT Covered by a Retirement Plan at Work)
|Filing Status||Full Deduction||Phase-Out||No Deduction|
|Single, head of household||No Limit||No Limit||No Limit|
|Married filing jointly (spouse not covered)||No Limit||No Limit||No Limit|
|Married filing jointly (spouse covered)||$173,000 or less||$173,000 – $183,000||$183,000 or more|
|Married filing separately (spouse covered)||Less than $10,000||$10,000 or more|
- 2012 ROTH IRA Income Limits
|Filing Status||Full Contribution||Contribution Phased Out||No Contributions|
|Single Filers||$110,000||$110,000 – $125,000||$125,000 or more|
|Joint filers||$173,000||$173,000 – $183,000||$183,000 or more|
General Income Tax Incentives
- Temporarily repeal the itemized deduction limitation: The amount of itemized deductions that a taxpayer may claim was reduced, to the extent the taxpayer’s AGI is above a certain amount. This limitation was repealed until 2012.
- Deduction of state and local sales tax (expiring for the 2012 tax year): For 2011 tax year, you can deduct state and local sales tax instead of the state and local income tax. This is one of the incentives whose fate is in limbo. If there is no new legislation, this incentive will expire in 2012.
- Deduction of private mortgage insurance premiums (expiring for the 2012 tax year) : You can deduct the homeowner’s private mortgage insurance premium for 2011, but this tax deduction expires in 2012 unless something changes.
Capital Gains and Dividends
Capital gains and qualified dividend rates (expiring for 2012 tax year) : For 2012, the long term capital gains rate and qualified dividends rate will be 0% for everyone in the 15% and lower tax bracket, 15% for everyone above the 15% tax bracket. If this is not extended, qualified dividends will be taxed as income and the long term capital gains rate will be 10% and 20% respectively for tax bracket 15% or lower and everyone else. I will have to check if it will be better to sell any appreciated stock this year if this tax rate is not extended for 2013.
|Long-Term Capital Gains Rate||2011||2012||2013 (if nothing changes)|
|Tax Bracket Above 15%||15%||15%||20%|
|Tax Bracket 15% or Below||0%||0%||10%|
|Qualified Dividends Rate|
|Tax Bracket Above 15%||15%||15%||taxed as income|
|Tax Bracket 15% or Below||0%||0%||taxed as income|
New reporting of Capital gains
There are 2 changes that affect how capital gains are reported.
- Brokers will be reporting cost basis along with the proceeds : This rule applies specifically to stocks purchased after Jan 1, 2011. Mutual funds and ETFs will be covered by this rule beginning on Jan 1, 2012, options & bonds will be covered beginning Jan 1, 2013. If you sold any stocks in 2011, expect to get this shiny new 1099-B sometime in Jan/Feb of 2012. The default accounting method is First In First Out (FIFO) method. Personally, I don’t sell stocks that way all the time. Make sure the reporting correctly reflects how you sold a stock. Otherwise you might end up with a larger tax bill or more than expected capital loss.
- We (tax payers) will be using Form 8949 while filing taxes. This shouldn’t be a big problem as any software should be updated to automatically do this.
These are mostly part of the tax cut deal that was passed at the end of 2010. The changes expire by the end of 2012 or for 2013 tax year unless otherwise noted.
- Temporarily extend expanded Coverdell accounts: The annual contribution limit until 2012 is $2,000 and the money can be used to pay for elementary and secondary school expenses as well.
- Temporarily extend the expanded exclusion for employer provided education assistance (expiring for the 2013 tax year) : Up to $5,250 provided by the employer as part of the education assistance program is exempt from income and employment taxes.
- Temporarily extend the expanded student loan interest deduction (expiring for the 2013 tax year)
- Temporarily extend the exclusion from income of amounts received under certain scholarship programs (expiring for the 2013 tax year).
- Temporarily extend the American Opportunity Tax Credit (expiring for the 2013 tax year): The tax credit of up to $2,500 of the cost of qualified tuition and related expenses including course material is extended until 2012.
- Above the line deductions for qualified education expenses (expiring for the 2012 tax year) : The ability to use above the line deductions for qualified tuition and related expenses was extended only through 2011.
Estate & Gift Tax limits
- Temporary Estate Tax Relief : Estate taxes were part of the Bush tax cut extension. $5 million per person and $10 million per couple was exempt from estate taxes in 2011. This will increase to $5.12 million per person in 2012.
- Portability of unused exemption : Unused exemption of a deceased spouse will transfer over to the surviving spouse.
- Gift tax limit : The limits for annual gift tax exclusion remains unchanged in 2012 – $13,000 per person and $26,000 per couple.
- Temporary Individual Alternate Minimum Tax (AMT) Relief : The AMT is patched every single year, so I am hoping it will be patched this year as well. But, it is not patched yet, so it goes here. If the “AMT patch” amounts expire, the AMT exemption reverts to its statutory amount: $45,000 for married individuals filing jointly. The exemption amounts for 2010 are $47,450 (individuals) and $72,450 (married filing jointly) and for 2011, $48,450 (individuals) and $74,450 (married filing jointly).
- Payroll holiday : Prior to the payroll tax holiday, the employees paid 6.2% and employers paid 6.2% social security taxes on wages up to $106,800. Self-employed individuals pay the entire 12.4%. Payroll holiday tax deal cut the employee portion of the social security tax by 2% for 2011. So the employees with paid 4.2%, employers 6.2%. The self employed individuals paid 10.4% in social security taxes. This was extended for 2 months into 2012, but NOT for the entire 2012. Which means you pay will be slightly less when this provision expires after Feb 2012.
- Above the line deductions for school teachers (expiring for the 2012 tax year) : Elementary and Secondary school teachers can take up to $250 above the line deductions for professional expenses incurred, like books, office supplies, computer, etc. for 2011. This expires in 2012.
- Tax free IRA distributions for charitable purposes (expiring for the 2012 tax year): Individuals can make tax free distributions to charity up to $100,000 per taxpayer directly from their Individual Retirement Accounts (IRA).
- Mass Transit benefit : The employer provided transit and vanpool benefit is excluded from income tax. This exclusion will now extend to include employer provided parking benefits as well.
- Many business tax incentives are also scheduled to expire at the end of the year. The most significant of these are the expiration of the allowance for 100% first-year bonus depreciation and the expiration of the increased deduction amounts.
I will keep an eye on the new legislation and write a post explaining any new laws or extensions. But this is how it stands right now, so use it as a quick guide for planning ahead for 2012 and beyond. The 2011 tax guide with
- Tax organizer
- Easily overlooked deductions
- Dates to remember
- Places to get free tax help
- Money saving tips and more
will be available on Feb 12, 2012. I will also have a TurboTax premier giveaway.