2012 and 2011 tax rates stayed the same as 2010 levels thanks to an extension of the Bush-era tax cuts. This has been confirmed by the IRS with the release of 2012 tax tables. There was also good news in that the 2012 standard deduction and tax brackets will increase due to higher inflation, which means lower effective taxes on your current income (see explanation below). Final figures for 2012 federal income tax brackets and standard deductions are shown below, with a detailed table by all filing status’ at the end of this article.
Higher Taxable Income Brackets and Standard Deduction = Lower Taxes. The good news with higher tax brackets and standard deductions is that your tax bill may actually drop a little because more of your income is taxed in the lower brackets. All things being equal, a married couple with taxable income of $100,000 should expect to pay $185 less in income taxes in 2012 thanks to inflation adjusted tax brackets. Adjusting tax brackets for inflation deals with the issue of “bracket creep,” where tax payers pay more and more taxes as their income (due to inflation) rises over time. More than 60% of taxpayers will also benefit from the higher standard deduction because they don’t have enough deductions to justify itemizing.
Taxable income vs Adjusted Gross Income. After writing this article I received a lot of questions/comments on the different definitions of income. So I thought I would write this short excerpt to clear things up. The IRS defines Adjusted Gross income (AGI) as gross income (your income from all sources) minus “certain” adjustments. These adjustments include deductions taken for IRA contributions, qualified tuition, student loan interest, and exclusions for foreign housing, qualified bond interest, employer-paid adoption expenses, and domestic production activities. You can estimate your AGI by looking at your federal income tax return from previous years or through online tax software.
Taxable income, used for figuring your federal and state income, is the amount of income subject to income taxes and is found by subtracting your eligible deductions and credits from your adjusted gross income (AGI). In this article unless explicitly specified, all references to income are taxable income.
How to figure your effective and marginal tax rate: Because the US tax system is progressive or graduated, your effective tax rate is not a flat rate. Your taxes are figured based on the portion of your taxable income that falls into the respective tax bracket, with the top rate you pay (based on the final bracket you fall in) being your marginal tax rate. For example, if you’re single and have a taxable annual income of $60,000 (your actual income may be much higher) after deducting your applicable personal exemption, standard or itemized deduction, you pay 10% on a portion of your taxable income up to the 2012 expected bracket limit of $8,650, 15% on the next portion and 25% on the third and final portion. Your marginal or top tax rate is 25%, with your effective tax rate being total taxes paid, divided by total income. In this case it would be $11,097/$60,000 = 18.5%. See the table at the end of the post to figure out your marginal tax liability.
Other tax breaks have been extended into 2012 and should be factored into your tax planning include:
- The Personal exemption in 2012 has increased by $100 to $3,800. The standard deduction, claimed by tax payers who don’t itemize deductions, will increase by $300 for married couples and by $150 for singles and married people filing separately. It increases $200 for heads of household.
- Capital gains and dividend taxes -Long-term capital gains (on assets held at least a year) and qualified dividends will continue to be taxed at a maximum of 15%. This benefit will mean that investors can keep more of their gains. Short term capital gains will continue to be taxed at ordinary income tax rates.
- Estate limit increase and lower taxes – Existing thresholds will be raised to $5.12 million for an individual or $10.24 million for a couple for both estate and gift-tax levies, with a top tax rate of 35%. These new provisions will expire at the end of 2012, meaning a lot of revised estate planning for families. Taxpayers who have already used some of their lifetime exclusion under the old rules ($1 million) will be eligible for the higher exemption limit.
- The annual gift-tax exclusion remains unchanged at $13,000 for singles and $26,000 for a couple. This amount is what you can give away, per person, without any associated tax liability. This is in addition to the lifetime limits.
- The American Opportunity Credit, which allows eligible college students and their parents to save up to $2500 on their taxes has also been extended into 2012. The AOTC replaced the Hope credit and will continue to do so for 2011 and 2012. The teachers Tax Credit (up to $250) for teachers who purchase classroom supplies using their own money is also likely to be extended into 2012 (to be requested in 2012 budget)
- Other tax credits extended into 2012 include the Child Tax Credit, which provides $1000 per child under 17 years-old, and the Earned Income Credit, which reduces the marriage penalty and creates a “third tier” of the EITC for families with three or more children.
2012 Tax Rates and Income Brackets By Filing Status
The table below provides an easy way to figure your marginal tax liability based on your taxable income and filing status. For example, if Jeremy and Diane filing a joint return and their combined taxable income is $145,000, their marginal (top) tax bracket rate is 28%. Before deductions and credits, they can expect to face a federal tax liability of $27,735 plus 28% of the excess over $142,700. This is equal to $27,375 + ($145,000 – $142,700) or $30,035. Their effective federal tax rate is $30,035/$145,000 = 20.7%.