All of these tax breaks are about to expire on 31st December 2012. The Bush tax cuts from 2001-2003 and the more recent tax breaks such as the 2% payroll tax break will expire at the end of December 2012. In addition some of the provision of Obama administration’s new health care bill will begin to come into effect as well. At the same time there are scheduled government budget cuts that will come into effect as well. All of this is good from a fiscal discipline perspective and will go to help the government manage its budget and lower the debt burden eventually. However it also means that there is a likely blow to the economy with higher taxes and lower spending. If all of the laws went into effect without any intervention, the result is likely to be another recession. So both political parties have a vested interest in arriving at a compromise and there is a very good chance of a deal.
So while we are waiting for the politicians to resolve their differences and provide the tax payers with some clarity over the next few years, here are some tax related changes that will affect your 2012 tax return as you prepare to file in the upcoming tax season.
Changes in 2012 Tax Return
For the Tax year 2012, the personal and dependent exemption amount is increasing to $3,800, up $100 from 2011.
In 2012 the standard deduction for married couples filing a joint return is increasing by $300 to $11,900, and for singles and married individuals filing separately it's $5,950, up $150 from 2011. For heads of household the deduction is $8,700, up $200 from 2011.
The additional standard deduction for blind people and senior citizens in 2012 is unchanged from 2011, remaining at $1,150 for married individuals and $1,450 for singles and heads of household.
Income Tax Rates
Tax-bracket thresholds will increase for every filing status to adjust for inflation. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700 for a married couple filing a joint return, up from $69,000 in 2011.
Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5.12 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. The annual exclusion for gifts continues to remain at $13,000.
Gift and Estate tax is a complex subject and requires extensive tax planning. For grandparents that invest the time in the planning process, this is a great way to leave behind a legacy of higher education for the next generation while saving on the heavy burden of taxes.
Alternative Minimum Tax (AMT)
AMT exemption amounts for 2012 have reverted to 2000 levels and will remain significantly lower than in 2011 unless Congress takes action before year-end: $33,750 for single and head of household fliers, $45,000 for married people filing jointly and for qualifying widows or widowers, and $22,500 for married people filing separately. This is likely to increase the tax burden on the middle class families.
Long Term Capital Gains
In 2012, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.
The Capital Gains tax rate is most likely to increase as part of the Fiscal Cliff deal and hence several high net worth families and corporates have been selling their stocks and assets in order to book capital gains in 2012 at the 15% rate. In case you missed on the opportunity to plan ahead for this in 2012, there may still be some time in 2013 for you to do some planning for the years ahead.
Given the country’s debt and fiscal position, it is safe to assume that tax rates are only destined to go up in the near future. Some tax planning with your tax accountant will help you protect your hard earned income from increase in taxes.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax, financial or legal advice. Consult your tax accountant, financial advisor and legal advisor regarding your specific individual tax and financial situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.