What are the Federal Income Tax changes for 2012?

Every year, there are modifications to tax laws that make significant impact. We all have to be aware of the details these amendments so we can plan our finances or take advantage of these changes.

2012 FEDERAL INCOME TAX BRACKETS

Marginal tax 

Taxable income

Single

Married filing jointly

10%

$8,700 or less

$17,400 or less

15%

Over $8,700 but not over $35,350

Over $17,400 but not over $70,700

25%

Over $35,350 but not over $85,650

Over $70,700 but not over $142,700

28%

Over $85,650 but not over $178,650

Over $142,700 but not over $217,450

33%

Over $178,650 but not over $388,350

Over $217,450 but not over $388,350

35%

Over $388,350

Over $388,350

Source: IRS

There is a lower tax rate for children

For 2012, children under 19 years old are not required to pay federal income tax on the first $950 of unearned income (i.e. interest or capital gains). The tax that will be applied to them on the next $950 will be based at their own rate – 0 percent for long term capital gains and 10 percent on the other unearned income. On the other hand, it will be taxed at the parents’ tax rate on unearned income that is over $1900. This will be no difference with full time college students who are age 24 and below except when their earnings exceed one half of their parents’ support. Individuals who are 19 and older who are dependent full time college students pay their taxes at their own rate. If the individual belongs to the 15% bracket or below, there will be 0% tax on the long term capital gains eligible dividends through 2012.

There is an increase in the Federal Withholding Allowance for 2012 .Withholding allowances for the individual and the dependents increases up to $3800.

FICA or Federal Insurance Contributions Act Tax

Federal Insurance Contributions Act Tax (FICA tax) has the authority to collect payroll taxes for Social Security benefits. The income base limit for Social Security (Survivors, Old age and OASDI or Disability Insurance) withholding was elevated to $110100. Usually, there would be a maximum of $6826.20 employee withholding at 6.2 percent, but congress has extended decreased Social Security withholding at 4.2 percent for the first couple of months of 2012. The income base for Medicare withholding stays unlimited for employee tax rate of 1.45 percent, yet based on the present health care reform legislation would elevate by 0.9 percent to 2.35 percent in 2013 for amounts that exceeds $200,000 for single tax payers or $250,000 for married filing jointly. Furthermore, an extra 3.8 percent surcharge would be applicable to investment income tax payers with AGI exceeding $200,000 for single or $250,000 for married filing jointly.

2012 Standard Deductions

As reported by the IRS, it is estimated that 2 out of every 3 tax payers obtain the standard deduction on their income tax returns. This year (2012), there is a change to the standard deduction amounts for all the tax payers: For Single tax payers – $5950, there is an increase of $150, for married tax payers (filing separately) – $5950, there is an increase of $150, for head of household – $8700, there is an increase of $200 and married tax payers (filing jointly) or qualifying widow widower – $11900, there is an increase of $300

Increase in Earned Income Credits in 2012

The earned income credit is applicable to working tax payers who have earned income dropping below particular thresholds. Qualification threshold is based on the quantity of persons in each family. The 2012 thresholds to qualify for this credit are: No children – the earning must be below $13,980 or $19,190 if married (filing jointly). One child – the earnings must be below $36,920 or $42,162 if married (filing jointly). Two children – the earnings must be below $41,952 or $47,162 if married (filing jointly). Two or more children – the earnings must be below $45,060 or $50,270 if married (filing jointly)

Also the tax credits have also elevated in 2012 along with the maximum credits: No children – $475, one child – $3,169, two children – $5,236 and three or more children – $5,891

Retirement Accounts Contribution

Contribution limitations for 401k and also 4403b plans elevated by $500 to $17,000 in 2012. Catch up contributions stay at $5,500, contribution limitations to the usual retirement plans remain at $11,500 as well as to catch up contribution limitation of $2500 Even if this contribution limitation can be altered for inflation, it has not elevated for the past 3 years. The income limitations for tax payers that are prepared to contribute to traditional IRA and the Roth IRA plans elevated slightly once again in 2012. The wage phase out threshold for Roth IRA begins at $173,000 for those joint filing returns and that is an increase of $4,000. Phase out threshold for tax payers submitting their tax return as single or head of the household is not $110,000 that is a $3,000 elevation from the last year’s rate.

If you are qualified for a retirement plan at work and you are thinking about contributing to a tax deductible traditional IRA, the 2012 income phase out limitation begins at $92,000 for joint filers wherein there is an elevation of $2,000 from the previous year and an increase to $58,000 for the tax payers with filing status of head of household or single, there is an increase of $2,000 from the previous year.

Exemption Rate

The rate or the amount that you can subtract for every exemption claimed on a federal income tax return in 2012 also increased from the 2011 value. The year’s exemption of $2800 represents a $100 increase from the previous year’s amount.

Exemption from the AMT (Alternative Minimum Tax)

Congress increased the income exemption rate to $72,250 for married couples (filing jointly) and $48,450 for single tax payers for 2011 tax year. It is highly possible that the Congress will increase the limits again for 2012 tax year and make the yearly adjustment permanent.