2/16/2012 11:15 PM ET|
5 tax trends that could hurt you
You may not yet be ready to think about what could happen when you file your taxes next year, but political uncertainty could mean big changes.
As millions of Americans sit down to crunch out this year's tax forms, they may want to start thinking about 2013.
"Uncertainty" is the best way to describe 2012's tax environment due to changing rules, deficit debates and election-year posturing.
We took a look at five trends that may have a big impact on the government's bite in the months ahead:
Your 2012 taxes could benefit from what is usually a painful force of economics. There may actually be an upside 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," according to the Internal Revenue Service.
The formula used in indexing showed a relatively higher amount of inflation this year over last, just over 3.8%, according to CCH, a Wolters Kluwer business and provider of tax information, software and services. This increase is well above the 1.4% amount used last year and the 0.18% inflation factor used in 2010.
"Most taxpayers benefit from inflation adjustments, since they tend to preserve the value of most, but not all, of the dollar-based benefits under the tax code year after year," says George Jones, a CCH senior federal tax analyst.
The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011, according to the IRS.
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, up $200. Nearly two-thirds of all taxpayers take the standard deduction, rather than itemizing deductions such as mortgage interest, charitable contributions and state and local taxes, the IRS says.
When there is inflation, indexing of brackets lowers tax bills by including more of people's incomes in a lower bracket, an analysis by CCH explains.
Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket is $70,700, up from $69,000 in 2011.
CCH says to expect slightly higher standard deduction and personal exemption amounts for 2012 in most cases, as well as amounts that might be claimed from an increase in the income ceilings imposed on tax benefits such as education credits, individual retirement account contributions and more.
"Combined, inflation-based tax savings for 2012 can become substantial," the CCH analysis says. "Because of inflation adjustments, a married couple filing jointly with a total taxable income of $100,000 should pay $190 less income taxes in 2012 than they will on the same income for 2011 because of indexing of their tax bracket for 2012. A single filer with taxable income of $50,000 should owe $95 less next year due to the adjustments to the income tax rate brackets between 2011 and 2012."
For taxpayers with taxable income over the start of the top 35% bracket, the maximum dollar savings from indexing the tax brackets for 2012 will be "more dramatic."
"Not only is the top 35% rate bracket projected to rise from $379,150 to $388,350, but, as is the case for all individual taxpayers, the rise in the bracket amounts below the individual's top marginal rate (that is, the incremental value of the 10%, 15%, 25%, 28% and 33% brackets for someone in the 35% marginal rate bracket) also benefits the individual taxpayer," CCH says. "As a result of the inflation adjustment in each of the brackets, someone filing a joint return with taxable income of $450,000 in 2012, for example, will pay $732 less in income taxes in 2012 than in 2011."
Among the new inflation-adjusted tax figures for 2012 is the estate-tax exemption. Previously set at $5 million, an inflation adjustment means that up to $5.1 million of an estate will be exempt from the current 35% tax.
Also increasing are contribution limits to most retirement savings plans -- including 401k, 403b and the federal Thrift Savings Plan -- from $16,500 in 2011 to $17,000 ("catch-up" contribution limits for those 50 and older remain at $5,500).
You don't tug on Superman's cape. You don't spit into the wind.
And, if you are a politician in an election year, you avoid anything other than sugarcoated tax discussions.
For months, Congress has punted any real discussion of taxes down the road, likely until after November's elections. A wide range of political stalemates and temporary compromises means a whole lot of uncertainty for taxpayers in the year ahead.
"One common theme during 2011 for practitioners and taxpayers was the lack of certainty in tax planning for future years," CCH principal tax analyst Mark Luscombe says. "And that uncertainty was magnified by the scheduled expiration of many tax incentives after Dec. 31, 2011, and the end of the Bush-era tax cuts after 2012, due to extension by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010."
What's the fate of the Bush-era tax cuts (extended through 2012) and a variety of tax extenders? Will the maximum tax rate for capital gains increase to 20% from 15% or more if the Bush-era tax cuts expire?
Should the "rich" be taxed at a higher rate, a position taken by President Barack Obama and derided by conservatives?
Will there be changes to the personal exemption phase-out, something that would be a boon to wealthier Americans?
Are changes afoot for future implementations of the estate tax? CCH cites expert speculation that the current $5.1 million exclusion will be lowered to $3.5 million and the top rate will rise to 45%.
Will deficit reduction talks -- including the stalled response to the budget-cutting supercommittee -- lead to increased revenue plays, a major point of division among Democrats and Republicans?
No one really knows, and we'll all have to wait until November's elections are in the history books to get a clear read.
An impact of all that uncertainty is that numerous tax strategies will be difficult to commit to in 2012. Income shifting in its many forms (deferred compensation, delaying year-end billings, maximizing retirement contributions, etc.) will be a gamble, given that no one knows -- or will know until late in the year -- how taxes will rise or fall.
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