2011 tax adjustmentsEvery year, the IRS reviews the rate of inflation, and adjusts tax benefits and tax brackets to reflect the changes. For years, there haven’t be changes in a number of items, due to fact that inflation metrics reported by the government were not significant.

However, inflation has picked up that the IRS is ready to make some inflation adjustments for the 2012 tax year. These adjustments won’t be applicable for tax year 2011 (tax return due in April 2012), but they will be in effect next year (tax return due in April 2013).

Here are some of the changes:

  • Personal and Dependent Exemption: The personal and dependent exemption will rise by $100 in 2012, to $3,800.
  • Standard Deduction: For married couples filing jointly, the new Standard Deduction will be $11,900 – up by $300. For singles and married persons filing separately, the new deduction is $5,950. Heads of household can take a standard deduction of $8,700 starting with tax year 2012.
  • Foreign Earned Income Credit: If you are claiming a credit for foreign earned income, the deduction has risen to $95,100, which is an increase of $2,200 over the level in tax year 2011.
  • Earned Income Tax Credit (EITC): The EITC is rising to $5,891 for low- and moderate-income families. The maximum income for claiming the EITC has risen as well, up to $50,270. (The actual amount of the credit varies according to income level and family size.)
  • Lifetime Learning Phase-Out: The popular Lifetime Learning Tax Credit will be phased out at $104,000 for those who are married and filing jointly, which is higher than the 2011 level of $102,000. For those who are filing as single or head of household, the new income level for phase-out starts at $52,000.
  • Student Loan Deduction: Phase outs for the Student Loan Deduction (maximum $2,500) will begin at $125,000 in 2012, and leave those ineligible at the $155,000 level. There is no change for those who are single.
  • Medical Savings Accounts (MSAs): The minimum and maximum annual deductibles have changed, respectively, to $2,100 and $3,150 for self-only coverage and $4,200 and $6,300 for family coverage. Maximum annual out-of-pocket expenses have risen to $4,200 for self-only coverage and $7,650 for family coverage.
  • Estate Tax: The new exclusion amount for the estate tax is $5,120,000.

There are some items, like the gift tax exclusion ($13,000) that will remain the same in 2012. However, tax brackets are changing in 2012. One of the prevalent shifts is from the 15% tax bracket to the 25% tax bracket. In 2011, the threshold is $69,000, but in 2012, it will take $70,700 to bump a married couple up from the 15% bracket to the 25% bracket.

Planning Your Taxes

Understanding the changes to tax benefits and tax brackets can be helpful as you engage in tax planning for the coming year. In many cases, the breaks that you can expect can help you better plan your spending, and other items, so that you maximize your tax efficiency.

Look over what you can expect for 2012, and begin looking for ways that you can reduce your tax liability.