Key Changes in Tax Laws for 2012 Individual Returns
Understand the significant tax law changes that will affect your 2012 tax return.
Every year brings tax changes and 2012 is no exception. This article looks at the key federal tax law changes that affect your filing in April 2013. And don't forget to check for new state tax laws that could affect you too. A good place to start is the website for your state's tax agency. For everything you need to know to get your personal tax return together this year, check out Nolo's Personal Income Taxes section.
Payroll Tax Holiday Extended Through 2012
Ordinarily, employees each pay a 6.2% Social Security tax up to the annual wage limit. However, the 2% payroll tax holiday enacted for 2011 has been extended through 2012. This means that for 2012, the employee portion of Social Security tax is 4.2%. For self-employee taxpayers, the Social Security tax is set at 10.4%. It's doubtful that this reduction will be extended for 2013.
Every year the dollar amounts for dozens of tax provisions are adjusted to keep pace with inflation. The new dollar amounts for 2012 include the following:
- For an estate of any person dying during 2012, the basic exclusion from estate tax is $5.12 million up from $5 million for 2011. The lifetime gift tax exclusion is also $5.12 million for 2012.
- The wage limit on which employees and employers must pay Social Security tax went up for 2012 to $110,100. There is no wage limit on the 2.9% Medicare tax.
- The annual contribution limit to 401(k) plans, 403(b) plans, and some 457 plans was increased $500 for 2012.
- The value of each personal and dependent exemption 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. Most taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions, and state and local taxes.
- Tax bracket thresholds have been adjusted upward, resulting in a decrease in taxes. For a married couple filing a joint return, for example, the taxable income threshold separating the 15% bracket from the 25% bracket is $70,700, up from $69,000 in 2011. Such a couple will pay $255 less in income tax in 2012 over 2011.
- 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 maximum compensation used to determine contributions to qualified retirement plans is $250,000, up from $245,000 in 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.
Commuting and Parking Expenses
An employer may pay up to $240 per month for an employee's parking and the employee will not have to pay tax on the amount. However, the tax exclusion for employer-provided transit passes and van pooling expenses has been cut to $125 per month for 2012, down from $230 in 2011.
Reduced Adoption Credit
The tax credit for adoption expenses is limited to $12,650 for 2012 (down from $13,360 for 2011). Moreover, the adoption credit is no longer refundable, meaning it is only deductible from income taxes actually owed for the year.
Alternative Minimum Tax
Unless Congress enacts a new “patch” for the amount of income exempt from the alternative minimum tax (AMT), these amounts will revert to the significantly lower “permanent” levels of $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for marrieds filing separately. This will subject many more taxpayers to the AMT.
Reporting Foreign AssetsBeginning in 2012, U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, with their tax return.
The following important tax provisions expired at the end of 2011. Congress may extend them through 2012, but no one knows for sure.
- Residential energy credit. In 2001, a $500 lifetime credit was allowed on 10% of the cost of qualified purchases of energy-efficient home improvement materials.
- Educator expenses deduction. In 2011, a classroom educator could deduct up to $250 of the cost of school supplies used in class.
- State sales tax deduction. Instead of deducting state and local income taxes, itemizers had the option of deducting state sales taxes in 2011.