Taxpayers May Benefit From IRS' Newly Announced 2012 COLA Adjustments

As a result of the rising cost of living, the Federal income tax brackets will jump higher and taxpayers will be able to set aside an extra $500 in their 401(k) plans in 2012. The IRS recently announced their cost-of-living adjustments (COLA) for 2012 which are triggered when certain statutory thresholds are met. Highlights of the 2012 adjustments include:

• The 401(k), 403(b) and most 457 plan contribution limits will increase to $17,000 (up from $16,500 in 2011). However, the catch-up contribution limit for those aged 50 and over remains unchanged at $5,500 in 2012.
• The modified adjusted gross income limits for taxpayers that are covered by a workplace retirement plan and want to make deductible contributions to a traditional IRA will be phased out for singles and heads of household between $58,000 and $68,000 (up from $56,000 and $66,000), and for married filing jointly between $92,000 and $112,000 (up from $90,000 and $110,000).
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered by a plan, 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). For singles and heads of household, the income phase-out range is $110,000 to $125,000 (up from $107,000 to $122,000).
• The IRS announcement on cost-of-living adjustments for 2012 also affects the standard deduction, the personal exemption and the 2012 tax bracket thresholds as well;
  • The personal and dependent exemption will increase to $3,800 (up from $3,700 in 2011).
  • The standard deduction for married couples filing jointly will jump to $11,900 (up from $11,600) and for single filers and couples who file separately will jump to $5,950 (up from $5,800).
  • Tax bracket thresholds will also rise. For example, for married couples filing jointly, the 25% bracket will kick in at $70,700 (up from $69,000) this year. For single filers, the 25% bracket will start at $35,350 (up from $34,500). The top income tax bracket of 35% will apply to taxable income exceeding $388,350 for married couples and individual filers (up from $379,150).
• The estate tax exemption for 2012 will be $5.12 million (up from $5 million in 2011). The higher threshold is scheduled to expire at the end of 2012 and the $1 million limit under previous law is set to return in 2013.
• The annual exclusion for the gift tax will remain $13,000 for 2012.

Source: UHY LLP News Alert