IMPORTANT TAX LAW CHANGES FOR 2012
Hello everyone,
We hope you had a wonderful Christmas season and wish you all the best for a wonderful and prosperous New Year!
Every year brings new changes to the tax laws and 2012 is no different. Following is a checklist of tax changes to help the planning of the year ahead.
Based on the latest news report from the Department, the IRS will be ready to start accepting tax returns starting January 17th.
Please call us today at 928-680-1300 to ask any questions you may have and to schedule your appointment early! We look forward to seeing you again this year!
Alice Pietig
Individuals
The current tax rate structure ranging from 10% to 35% remains the same for 2012, but tax-bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation. For details see Tax Brackets and Exemptions for 2012 below.
Alternate Minimum Tax (AMT)
Alternate Minimum Tax (AMT) limits decrease for all taxpayers at $33,750 for singles, $45,000 for married filing jointly, and $22,500 for married filing separately.
“Kiddie Tax”
For taxable years beginning in 2012, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $950. The same $950 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”. For example, one of the requirements for the parental election is that a child’s gross income for 2012 must be more than $950 but less than $9,500.
For 2012, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $1,900, the same as 2011.
Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2012, a qualifying HDHP must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage (unchanged from 2011) and must limit annual out-of-pocket expenses of the beneficiary to $6,050 for self-only coverage (up $100 from 2011) and $12,100 for family coverage (up $200 from 2011).
Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs), the Archer MSA created to help self-employed individuals and employees of certain small employers and the Medicare Advantage MSA, which is actually an Archer MSA as well, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and both MSAs require that you are enrolled in a high deductible health plan (HDHP).
Self-only coverage. For taxable years beginning in 2012, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,100 (up $100 from 2011) and not more than $3,150 (up $150 from 2011), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,200 (up $150 from 2011).
Family coverage. For taxable years beginning in 2012, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,200 (up $150 from 2011) and not more than $6,300 (up $250 from 2011), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,650 (up $250 from 2011).
Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2012, the limitation is $350. Persons over 40 but less than 50 can deduct $660. Those over age 50 but not more than 60 can deduct $1,310, while individuals over age 60 but younger than 70 can deduct $3,500. The maximum deduction $4,370 and applies to anyone over the age of 70.
Adoption Assistance Programs
For taxable years beginning in 2012, the amount that can be excluded from an employee’s gross income for the adoption of a child with special needs is $12,650. In addition, the maximum amount that can be excluded from an employee’s gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee is $12,650 (down from $13,360 in 2011).
The amount excludable from an employee’s gross income begins to phase out under for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.
Taxpayers adopting children are eligible for both the adoption credit (see below) and the adoption assistance exclusion of adoption expenses paid for through an employer’s adoption assistance plan. However, the same adoption expense cannot qualify for both the adoption credit and the adoption assistance exclusion.
Foreign Earned Income Exclusion
For taxable years beginning in 2012, the foreign earned income exclusion amount is $95,100, up from $92,900 in 2011.
Estate Tax
For an estate of any decedent dying during calendar year 2012, the basic exclusion amount is $5,120,000, up from $5,000,000 in 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011. The maximum tax rate remains at 35%.
Individuals – Tax Credits
Adoption Credit
For taxable years beginning in 2012, the credit allowed for an adoption of a child with special needs is $12,650. For taxable years beginning in 2012, the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $12,650. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.
Child Tax Credit
For taxable years beginning in 2012, the value used to determine the amount of credit that may be refundable is $3,000.
Earned Income Credit
For tax year 2012, 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. In addition, for taxable years beginning in 2012, the earned income tax credit is not allowed if certain investment income exceeds $3,200.
Additional Child Credit
The $1,000 per-child additional child tax credit has been extended through 2012. The credit will decrease to $500 per child in 2013.
Individuals – Education
Hope Scholarship – American Opportunity, and Lifetime Learning Credits
The maximum Hope Scholarship Credit allowable for taxable years beginning in 2012 is $2,500.
The modified adjusted gross income (MAGI) 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.
Interest on Educational Loans
For taxable years beginning in 2012, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $60,000 ($125,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($155,000 or more for joint returns).
Individuals – Retirement
Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000. Contribution limits for SIMPLE plans remain at $11,500. The maximum compensation used to determine contributions increases to $250,000 (up $5,000 from 2011 levels).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000
Saver’s Credit
The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.
Businesses
Standard Mileage Rates
The rate for business miles driven is 55.5 cents per mile for 2012, unchanged from the mid-year adjustment that became effective on July 1, 2011.
Section 179 Expensing
For 2012 the maximum Section 179 expense deduction for equipment purchases is $139,000 (down from $500,000 in 2011) of the first $560,000 (down from $2 million in 2011) of business property placed in service during the year.
Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, for tax years beginning in 2012 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $125 (down from $230 in 2011). The monthly limitation for qualified parking is $240 (up from $230 in 2011).
Work Opportunity Credit
The work opportunity credit has been expanded to provide employers with new incentives to hire certain unemployed veterans. Businesses claim the credit as part of the general business credit and tax-exempt organizations claim it against their payroll tax liability. The credit is available for eligible unemployed veterans who begin work on or after November 22, 2011, and before January 1, 2013.
While this checklist outlines important tax changes already in place for 2012, additional changes in tax law are more than likely to arise during the year ahead.
Tax Brackets, Deductions, and Exemptions for 2012
In 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation. By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:
- The value of each personal and dependent exemption, available to most taxpayers, 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, also up $200. The additional standard deduction for blind people and senior citizens remains unchanged from 2011 at $1,150 for married individuals and $1,450 for singles and heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
IRS Announces 2012 Standard Mileage Rates
Beginning January 1, 2012, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) became:
- 55.5 cents per mile for business miles driven
- 23 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.
The standard mileage rate are based on an annual study of the fixed and variable costs of operating an automobile.
Let us know if you have questions about which driving activities you should monitor as tax year 2012 begins.
Receive a Faster Refund with Direct Deposit
The New Year has arrived, which means . . . it is tax time!
This year, do you want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 78.4 million people had their tax refunds deposited directly into their bank accounts last year. It’s the secure and convenient way to get money in your wallet faster.
- Security. The payment is secure – there is no check to get lost. Each year thousands of refund checks are returned by the US Post Office to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund stolen.
- Convenience. There’s no special trip to the bank to deposit a check!
You can also electronically direct your refund to multiple accounts. With the new “split refund” option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions. The split refund option, using Form 8888, is also available for paper returns.
To request direct deposit, just ask us – We do not charge an additional fee for direct deposits – it is free!
Caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Also, make sure you have the correct nine-digit routing number and your account number when selecting direct deposit.
Filing Requirements for Dependents
Whether a dependent has to file a return generally depends on the amount of the dependent’s earned and unearned income and whether the dependent is married, is age 65 or older, or is blind.
Note: A dependent may have to file a return even if his or her income is less than the amount that would normally require a return.
Even if you are not legally required to file, you should file a federal tax return to get money back if any of the following apply:
- You had income tax withheld from your pay.
- You qualify for the earned income credit.
- You qualify for the additional child tax credit.
Contact us for further information. We’ll advise you about your particular situation.
·Financial Tips for January 2012
Create a Financial Plan and Monitoring System
If you haven’t already done so, prepare a financial plan and a budgeting system for monitoring your income, expenses, assets, and liabilities. The information you collect will enable you to start planning for retirement or other major life events. Use last year’s information to establish a budget for the coming year.
Set Up an Effective Filing System
Set up a well-organized filing system for storing your important documents and records.
Prepare for Taxes
Start getting ready for preparing your tax return for the preceding year. As you receive Forms W-2 and 1099 and other tax documents, file them immediately. This will reduce time spent looking for them later.
Request a Social Security number for any child regardless of age who does not already have one..