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Income Tax Changes on the Horizon

Inflation Changes Tax Brackets, Deductions for 2012 Tax Year

The IRS announced new changes affecting taxpayers for 2012, and you’re more likely to notice them compared to recent years. Personal exemptions and deductions will rise, and tax brackets will expand, all because of inflation.

Analysts think the IRS’ indexing formula is computing a 2012 inflation rate at just over 3.8%. It’s a pretty big difference compared to last year’s 1.4% and 2010’s 0.18%. For about 25 years, federal income tax brackets have taken inflation into account. The tax code requires inflation adjustments for more than 50 provisions.

The changes will impact the tax returns we’ll file in April 2013. Here’s a look at some of them:

  • The exclusion for the state tax will rise from $5 million to $5.12 million. The annual gift tax exclusion remains at $13,000.
  • Income tax brackets will increase. For a married couple filing jointly, the 25% bracket kicks in at $70,700, up from last year’s $69,000 figure. Single filers will reach the 25% bracket at $35,350 instead of 2011’s $34,500.
  • The personal and dependent exemption increases $100 from $3,700 to $3,800.
  • Married couples who file jointly will see their standard deduction jump $300 to $11,900. For single filers, it rises $150 to $5,950.
  • If you’re the head of the household, the standard deduction will rise $200 to $8,700.
  • Income earned abroad will see its deduction rise $2,200 to $95,100.

While inflation can mean a small drop in the value of a dollar, it can help you at tax time if your income doesn’t increase too dramatically. But while tax brackets and deductions change, the IRS’ enforcement and collection actions do, too.

IRS agents are becoming more aggressive against those who owe back tax debt, making wage garnishments and bank levies more likely. To help you resolve your back tax debt with the IRS, make sure to hire a tax attorney. Inflation or not, it’s a good hedge against your tax debt getting too out of control.

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