Perspectives Blog 10-31-11

Financial Perspectives

By Melanie Pelayo

The announcement of cost of living adjustments by the federal government a week ago not only heralded the first increase to Social Security benefits in 2 years, but it also increased some tax-related limits. Here’s a rundown of some key changes coming in for tax year 2012:

  • Tax-bracket thresholds will rise. For example, for a married-filing-jointly couple, the 25% bracket will kick in at $70,700, up from $69,000 this year. For single filers, the 25% bracket will start at $35,350, up from $34,500 in 2011. All else being equal, when tax bracket limits shift higher, more of your income is counted in a lower bracket, so the higher your income, the more savings you realize, as more of your money is shifted into lower tax brackets.
  • The personal and dependent exemption will increase to $3,800, from $3,700 in 2011.
  • The standard deduction for married-filing-jointly couples will jump to $11,900, a $300 increase, and for single filers and couples who file separately it will rise $150 to $5,950. For head-of-household filers, the standard deduction will increase $200 to $8,700. About two out of three taxpayers claim the standard deduction, according to the IRS.
  • The foreign earned-income deduction will rise to $95,100, up $2,200 from the maximum deduction in 2011.
  • The estate tax exclusion will rise to $5.12 million in 2012, from $5 million; however, due to rounding conventions used to calculate which numbers will increase, the annual gift tax exclusion will still remain $13,000.

Some tax perks phase out for taxpayers at certain income levels, but for at least two college-related tax breaks, inflation adjustments will increase those income limits.

  • For taxpayers who claim the lifetime learning credit, the income phase-out rises to $104,000 for married-filing-jointly taxpayers, up from $102,000 in 2011, and to $52,000 for single filers and heads of household, up from $51,000.
  • For the $2,500 above-the-line deduction for interest paid on student loans, the income phase-out limits will rise only for married couples who file jointly. That tax perk will start to phase out at modified adjusted gross income of $125,000, and will disappear entirely at $155,000 — both those figures are $5,000 higher than in 2011. For single taxpayers, the phase-out limit remains the same in 2012 as in 2011: $60,000 to $75,000.

Retirement-Plan Contribution Limits Rise

The IRS also increased how much you can contribute to your 401(k), as well as other retirement-plan limits:

  • The maximum contribution to 401(k), 403(b), most 457 plans and the government’s Thrift Savings Plan will jump to $17,000, from $16,500 in 2011. But the catch-up contribution limit for those 50 and older will stay the same, at $5,500.
  • The income phase-out for those who contribute to a Roth IRA also will rise. For married-filing-jointly couples, the phase-out range is $173,000 to $183,000, up from $169,000 to $179,000. For singles and heads of household, the range will be $110,000 to $125,000, up from $107,000 to $122,000.

Unfortunately, increases did not extend to contributions to IRAs, as annual limits stayed at $5,000 plus $1,000 for those 50 and over allowed a catch-up contribution.

Happy Halloween to everyone!