Five Tax Updates for Filing Your 2012 Taxes
Stay up to date with available tax credits and deductions
Whether you are filing a tax return for the first time or have been filing for decades, it's important to understand that tax laws change from one year to the next. Keeping up with current tax laws can help you take advantage of available credits and deductions, while also avoiding possible penalties. Here are some of the biggest updates for the 2012 tax year.
Personal and dependent exemptions
When filing a tax return, you are allowed to claim a personal exemption as well as an exemption for any dependents you support. This effectively works as a deduction to lower your taxable income, and the amount of the exemption changes with inflation each year. In 2012, the personal and dependent exemption will be $3,800, which is up $100 from 2011.
Tax filers have a choice of taking a standard deduction or itemizing their expenses. Itemizing allows you to list specific deductions such as medical and dental expenses, mortgage interest and charitable contributions. Yet, according to the IRS, almost two-thirds of taxpayers take the standard deduction. In 2012, standard deductions will increase from 2011 as follows:
- Single or Married Filing Separately: $5,950 (up $150)
- Head of Household: $8,700 (up $200)
- Married Filing Jointly and Qualifying Widow(er)s: $11,900 (up $300)
Earned income tax credit
Workers whose income falls below certain thresholds may be eligible for the earned income tax credit (EITC). In 2012, there are changes to both the qualifications and the earned credits as follows:
- No children: Credit of $475; if income is below $13,980 or $19,190 (married filing jointly)
- One child: Credit of $3,169; if income is below $36,920 or $42,130 (married filing jointly)
- Two children: Credit of $5,236; if income is below $41,952 or $47,162 (married filing jointly)
- Three or more children: Credit of $5,891; if income is below $45,060 or $50,270 (married filing jointly)
Students who continue their education past high school are eligible for tax credits, including the lifetime learning credit. This credit begins to phase out for taxpayers who have higher incomes, but the income threshold will be higher this year. In 2012, the lifetime learning credit will reduced for those with an adjusted gross income of $52,000 (single) or $104,000 (married filing jointly). This is up from $51,000 (single) and $102,000 (married filing jointly) in 2011.
Retirement contribution limits
New tax updates will bring a few changes when it comes to retirement savings. In 2012, contribution limits for 401(k) and 401(b) savings plans increased by $500 to a limit of $17,000. Changes in 2012 also bring increases to the income phase-out range for taxpayers who wish to contribute to Roth IRA plans. The new phase-out threshold is $110,000 for single filers and $173,000 for taxpayers who are married and filing jointly.
Understanding 2012 tax updates may keep you from overpaying (or underpaying) your taxes. Make an appointment with a tax professional or visit the IRS online (www.irs.gov) to learn more.