Income tax brackets are widened to adjust for inflation, as the IRS seeks to keep pace with the rising cost of goods and services.
Income tax brackets will be wider for tax year 2012, and personal exemptions and standard deductions, including those affecting estate taxes, will be higher, as the Internal Revenue Service adjusts its code to keep pace with inflation. The new dollar amounts will affect returns filed by most taxpayers in early 2013.
The adjustments are likely to be both welcome and worrisome to Main Street Americans who fear equally the prospect of tax increases and inflation. The cost of living, as measured by the Consumer Price Index, is rising at an annual rate of 3.8 percent, largely due to increases in food and fuel costs. This pace of inflation is robust enough to trigger an increase in the cost of living allowance social security recipients, as well as relief for American taxpayers. Individuals surveyed by Millionaire Corner in March listed tax increases as one of their top three financial concerns, followed closely by inflation. Only the prolonged economic downturn and national debt ranked as higher concerns.
Under the expanded income tax brackets and other inflation adjustments, the amount that can be claimed for personal and dependent exemptions has increased to $3,800, up by $100 from 2011. Married couples filing a joint return will be able to claim $11,900, an increase of $300 from 2011. Singles and married individuals filing separately can deduct $5,950, up $15 from 2011. Heads of the household can deduct $8,700, up $200 from last year.
According to the IRS, nearly two out of every three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
The IRS is also increasing the earned income tax credit for low- and moderate-income workers and working families to $5,891, up from $5,751 in 2011. The maximum income limit for an earned income tax credit will be $50,270, up from $49,078 in 2011. According to the IRS, the credit varies by family size, filing status and other factors. The maximum credit will go to joint filers with three or more qualifying children.
The deduction for foreign earned income will rise to $95,100, in increase of $2,200 from the maximum deduction for tax year 2011. Phase out for the lifetime learning credit will begin at $104,000 for joint filers, up from $102,000. The threshold will be $52,000 for singles and heads of household up from $51,000 for 2011.
Medical Savings Account deductions have also increased, as have the phase out thresholds for deductions on interest paid on student loans and the limit on qualified transportation benefits that are exempt from taxes. More details are available from the IRS.
The basic exclusion from estate tax will increase by $120,000 to $5,120,000 for a decedent dying during calendar year 2012. The annual exclusion for gifts remains at $13,000. The rules affecting income tax brackets, exemptions and deductions will be published by the IRS on November 7, 2011.