Higher prices mean lower taxes in 2012

You might pay less in taxes next year, but don't thank the politicians in Washington. Thank inflation.

By Stacy Johnson Oct 13, 2011 8:28AM

This post comes from Jason Steele at partner site Money Talks News.

 

No one likes paying taxes, so there's some good news on the horizon: Taxes for many people will go down next year. This will happen despite the political gridlock in Washington, so neither party can claim the credit.

 

If you've been to the grocery store or gas station, you know that prices are rising. But while inflation is bad news for your budget, it's good news for taxpayers. That's because the IRS uses inflation stats to adjust tax brackets every year to fight "bracket creep": something that would happen if inflation-indexed wages unfairly pushed people into higher brackets. In other words, if your pay doesn't go up next year, your taxes might go down. 

 

In the video below, Money Talks News' Stacy Johnson explains who stands to benefit most. You'll find more details on the other side.

As Stacy explained, since the value of the standard deduction, personal exemptions and tax brackets rise with inflation, all things being equal, you should pay less in income taxes for tax year 2012.  

 

Here are the three terms you need to know:

  • Personal exemptions. Exemptions are an amount you get to subtract before arriving at your taxable income, so the higher the better. For 2011, the personal exemption is $3,700, unchanged from the year before. But for 2012, thanks to inflation, it's estimated by tax publisher CCH to rise to $3,800. If that turns out to be the case, that's $100 less income you'll be taxed on. 
  • Standard deduction. When you file your taxes, you have the option of itemizing your deductions or taking the standard deduction. If you have a lot of tax-deductible expenses, such as interest on a mortgage or charitable donations, you might save more by itemizing. If not, you'll claim the standard deduction. Like the personal exemption, this too is indexed to inflation. If CCH's estimate is correct, married couples filing jointly will have an $11,900 standard deduction in 2012, an increase of $300. Single filers will have a standard deduction of $5,950, up $150 from 2011. A higher standard deduction means less taxable income.
  • Tax bracket adjustments. Of the three, this one can have the greatest effect on those who earn the most. If you understand marginal tax rates, you know that different parts of your income are taxed at different rates. For example, this year the first $8,500 of taxable income earned by a single person is subject to a federal income tax rate of 10%, and earnings from $8,500 to $34,500 are taxed at 15%. Fortunately, these thresholds rise every year, depending on inflation. In 2012, those first two brackets are estimated to move to $8,700 and $35,550. The top bracket of 35%, applied on income of more than $379,150 in 2011, will move to $388,351 in 2012.

As Stacy pointed out, while inflation adjustments apply to all taxpayers, those who make the most benefit the most. According to CCH, a married couple with taxable income of $100,000 will owe $190 less in income taxes for tax year 2012 than 2011. A married couple with taxable income of $450,000 in 2012 would pay $732 less in taxes.

 

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