Posts Tagged ‘2012 Tax Law Changes’

2012 Tax Benefits Increase Due to Inflation Adjustments

Thursday, October 20th, 2011

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

WASHINGTON — For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

  • The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
  • The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
  • Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

Credits, deductions, and related phase outs:

  • For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
  • The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
  • The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
  • For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased  from the tax year 2011 amounts; please see the table below.
Medical Savings Accounts (MSAs) Self-only coverage Family coverage
Minimum annual deductible $2,100 $4,200
Maximum annual deductible $3,150 $6,300
Maximum annual out-of-pocket expenses $4,200 $7,650

The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Estate and Gift:

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts remains at $13,000.

Other Items:

  • The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
  • Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

Details on these inflation adjustments can be found in Revenue Procedure 2011-52, which will be published in Internal Revenue Bulletin 2011-45 on November 7, 2011.

IRS Announces Pension Plan Limitations for 2012

Thursday, October 20th, 2011

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.  Highlights include:

  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
  • The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011.  For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000.  For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
  • The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

Below are details on both the unchanged and adjusted limitations.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans.  Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases.  Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415.  Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

The limitations that are adjusted by reference to Section 415(d) generally will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.  For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will increase from $16,500 to $17,000 for 2012.  This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the Federal Government’s Thrift Savings Plan.

Effective January 1, 2012, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $195,000 to $200,000.

Under section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule.  This special rule takes into account the following recent history of changes in the cost-of-living indexes:  (1) the cost-of-living index for the quarter ended September 30, 2009, was less than the cost-of-living index for the quarter ended September 30, 2008; (2) the cost-of-living index for the quarter ended September 30, 2010, was greater than the cost-of-living index for the quarter ended September 30, 2009, but less than the cost-of-living index for the quarter ended September 30, 2008; and (3) the cost-of-living index for the quarter ended September 30, 2011, was greater than the cost-of-living indexes for all prior periods.

For a participant who separated from service before January 1, 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant’s 2011 compensation limitation by 1.0327 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2008, to the quarter ended September 30, 2011.  For a participant who separated from service during 2010 or 2011, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant’s 2011 compensation limitation by 1.0376 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2010, to the quarter ended September 30, 2011.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2012 from $49,000 to $50,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A).  After taking into account the applicable rounding rules, the amounts for 2012 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $16,500 to $17,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $985,000 to $1,015,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $195,000 to $200,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $110,000 to $115,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500.  The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $360,000 to $375,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $16,500 to $17,000.

The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $95,000 to $100,000.  The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $195,000 to $205,000.

The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3).  After taking the applicable rounding rules into account, the amounts for 2012 are as follows:

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $34,000 to $34,500; the limitation under Section 25B(b)(1)(B) is increased from $36,500 to $37,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $56,500 to $57,500.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $25,500 to $25,875; the limitation under Section 25B(b)(1)(B) is increased from $27,375 to $28,125; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $42,375 to $43,125.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,000 to $17,250; the limitation under Section 25B(b)(1)(B) is increased from $18,250 to $18,750; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $28,250 to $28,750.

The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $90,000 to $92,000.  The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $56,000 to $58,000.  The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $169,000 to $173,000.

The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $169,000 to $173,000.  The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $107,000 to $110,000.

The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430(c)(2)(D) has been made is increased from $1,014,000 to $1,039,000.

Tax Hike Prevention Act of 2010

Friday, December 17th, 2010

Today President Obama signed the “Tax Prevention Act of 2010″ which provides the framework for the income taxation regulations for tax years 2011-2012.  CNN Money (http://cnnmoney.com) has provided an excellent encapsulated summary of the key provisions.  The unedited information from that website is provided below:

“Tax cut deal: How it affects you

Now that Congress has passed the Tax Hike Prevention Act of 2010, it will be sent to President Obama for his signature. And taxpayers will have some certainty about their tax situation, if only for the next 24 months.

The bill contains a bevy of tax breaks — new and extended — and emergency help for the jobless. Its cost over 10 years is estimated at $858 billion.

Here’s a rundown of some of the biggest ticket items that will affect individuals. (Except where noted, all provisions are for 2011 and 2012).

Extended income tax rates: $207.5 billion The six federal income tax rates will remain at the same levels they are today: 10%, 15%, 25%, 28%, 33% and 35%. In addition, itemized deductions will continue to be allowed in full for high-income taxpayers.

AMT fix: $137 billion More than 20 million tax filers will be protected from having to pay the so-called “wealth tax,” otherwise known as the Alternative Minimum Tax.

For tax year 2010, the bill will raise the amount of income that is exempt from the reach of the AMT to $47,450 for individuals and to $72,450 for couples filing jointly. In 2011, those exemption amounts will increase to $48,450 and $74,450 respectively.

In addition, the bill will allow taxpayers to apply nonrefundable credits (which reduce one’s tax bill dollar for dollar) to their tax liability — whether under the AMT or the regular tax code.

Social Security tax break: $112 billion Workers will get a 2 percentage-point break on their payroll tax for one year. Instead of paying 6.2% on wages up to $106,800, they will only have to pay 4.2% in 2011.

This tax break replaces the Making Work Pay credit, which expires this year.

Unlike Making Work Pay, which was limited to workers making less than $75,000 ($150,000 for couples), the payroll tax holiday will be available to everyone who pays into Social Security.

Expanded child tax credit: $90 billion The bill will retain the $1,000 child tax credit (up from $500 before the Bush tax cuts). It also will retain the reduced-earnings threshold, which allows more people to claim the credit as refundable.

A refundable tax credit is one paid to a tax filer even if the value of the credit exceeds his tax liability. So if a filer doesn’t owe any federal income tax but qualifies for the credit, it is paid to him in the form of a refund.

Smaller estate tax: $68 billion Barring any changes, the estate tax in 2011 and 2012 will be reinstated at an exemption level of $1 million and a top rate of 55%. But under the bill, the exemption level will be raised to $5 million and the top rate lowered to 35%.

The legislation will also reinstate the so-called “step up in basis” for beneficiaries of those who die in 2010, 2011 or 2012. A stepped-up basis means that when someone sells an inherited asset, his capital gains tax bill will be based on the asset’s price the day he inherited it, rather than when the decedent originally bought it.

Practically speaking that means the beneficiaries of those who died in 2010 will be allowed to choose which estate tax rules to follow — those of 2011 or those of 2010. Under 2010 rules, there is no estate tax but also no step-up rules; there is only an option to exempt $1.3 million worth of capital gains from tax.

Help for the jobless: $57 billion The unemployed will get a 13-month extension of the deadline to file for additional unemployment benefits — which go as high as 99 weeks in states hit hardest by job loss.

Extended investment tax rates: $53 billion Everybody will get to keep their low investment tax rates for the next two years. For most people, that means their qualified capital gains and dividends will continue to be taxed at 15%.

Low-income tax filers (those in the 10% and 15% brackets), however, will continue to enjoy a 0% tax rate on their capital gains or dividends.

Marriage penalty relief: $27 billion Marriage will still be hard (sorry), but not because less-than-wealthy two-earner couples will owe more to the IRS than they did when they were single.

The bill continues to ensure that the standard deduction for couples is exactly twice that for single filers. It also maintains an expanded 15% tax bracket so that the amount of income in that bracket for joint filers is exactly double that for single filers.

Expanded college credit: $18 billion Paying for college tuition in 2011 and 2012 will be made a bit easier with the retention of the American Opportunity tax credit, which is an expansion of the HOPE tax credit.

The Opportunity credit is worth up to $2,500 (up to 100% of the first $2,000 spent and up to 25% of the next $2,500), and it may be claimed for four years’ worth of college. Eligibility to take the credit is limited to those with modified adjusted gross income below $90,000 ($180,000 for couples filing jointly).

Individual tax break extensions: Costs vary The legislation will extend a number of tax breaks that have been introduced in the past few years such as the option to deduct on one’s federal return state and local sales tax instead of state and local income tax — at a cost of $6 billion. Also, it will extend a deduction for qualified tuition and other education-related expenses at a cost of $1.2 billion.

Less pricey extensions include a break for teachers to deduct up to $250 in classroom expenses (just under $400 million).”