Taxpayers still trying to cope with the fallout from the recession are expected to get some tax relief next year from mandatory annual adjustments in tax brackets, according to CCH.

CCH released its estimated ranges for each 2012 tax bracket on Thursday, along with projections for various inflation-sensitive tax figures, including the personal exemption and the standard deduction.

“Indexing for inflation has become an established part of our tax system, and it’s likely to be a part of the tax law for the foreseeable future – even as Congress debates changes to the tax rates themselves,” said CCH senior federal tax analyst George Jones. “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.”

CCH is fairly confident about its annual projections this time around. The tax information provider said the uncertainty facing projections at this time last year does not apply this year, thanks to the Tax Relief Act that extended the expiring Bush-era tax cuts last December through 2012. For 2011 and again in 2012, the basic income tax rate structure and framework upon which inflation-sensitive tax benefits are computed remain in place.

When there is inflation, the indexing of tax brackets lowers tax bills by including more of people’s incomes in lower brackets—in the existing 15 percent bracket, for example, rather than the existing 25 percent bracket. The formula used in the government’s indexing showed a relatively higher amount of inflation this year over last year, just over 3.8 percent. The increase is well above the 1.4 percent amount used last year, and far greater in comparison to the 0.18 percent inflation factor used to set 2010 tax amounts.

Although so-called “rounding conventions” keep some tax amounts for 2012 the same as they are for 2011, such as the $13,000 gift tax annual exclusion, most 2012 figures will increase.

Add to those savings the additional tax savings realized by slightly higher amounts for the standard deduction and personal exemption for 2012 in most cases, along with 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.

■   Because of inflation adjustments, a married couple filing jointly with a total taxable income of $100,000 should pay $190 less in income taxes in 2012 than they would 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-percent bracket, the maximum dollar savings from indexing the tax brackets for 2012 would be more dramatic. Not only is the top 35 percent rate bracket expected 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 percent brackets for someone in the 35 percent marginal rate bracket) also benefits the individual taxpayer. 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, would pay $732 less in income taxes in 2012 than in 2011.

Inflation Adjustments
Since the late 1980s, the U.S. Tax Code has required that federal income tax brackets be adjusted for inflation annually. Inflation adjustments have been inserted into the Tax Code in recent years with increasing frequency, CCH noted.

For example, the Code now requires over 50 other inflation-driven computations to determine deduction, exemption and exclusion amounts in addition to the 40 separate computations needed to inflation-adjust the tax bracket tables each year. The health care reform legislation passed in 2010 adds an even greater number of inflation adjustments to the Tax Code, although health-related indexing won’t start until 2013.

One of the new-for-2012 inflation-adjusted tax figures is the estate tax exemption. Set at a $5 million level for 2011 and 2012 under a temporary compromise struck at the end of 2010 between keeping and repealing the estate tax, the $5 million amount as applied in 2012 is required to be adjusted for inflation. For 2012, up to $5,120,000 of an estate will be exempt from the current 35-percent estate tax.

Most adjustments are based on Consumer Price Index figures for September through August immediately prior to the adjusted year. However, some inflation-adjusted figures are computed earlier and some later. For example, amounts such as the 2012 vehicle depreciation limits won’t be available until later in 2011, while the standard business mileage rate (which is currently set at 55.5 cents for the second half of 2011 due to a special mid-year adjustment) isn’t expected to be computed for 2012 and released until December 2011.

CCH’s projections for other indexed amounts are based on the relevant inflation data released Sept. 15, 2011, by the Labor Department. The IRS usually releases official numbers by December of each year.
CCH cautioned, however, that its tax bracket projections are provided for illustrative purposes only, and should not be used for income tax returns or other federal income tax related purposes until confirmed by the IRS later this year.

Some Items Not Indexed
Jones observed that some items in the Tax Code are not indexed for inflation and stay the same, while others rise by dollar amounts already written into the tax law.

“The exemption amounts for the alternative minimum tax are not indexed, which means that Congress must regularly either increase the amounts by statute or expose additional households to the AMT,” Jones said.

Congress has relied on one- or two-year AMT patches to account for inflation from the initially set amounts of $33,750 and $45,000, respectively. However, there is no technical requirement under the tax code to increase those amounts for inflation.

For 2011, the AMT exemption amounts as provided most recently by Congress under the 2010 Tax Relief Act are $48,450 for single individuals and $74,450 for married couples filing jointly. No amounts have been set yet for 2012. While they are scheduled to revert to the default amounts of $33,750/$45,000 without action, the expectation is that, once again, Congress will raise the AMT exemption amount until it finds a permanent solution.

Standard Deduction, Personal Exemption Rise
The standard deduction and personal exemption amounts are also subject to indexing. After very little movement in the 2010 amounts, 2011 saw a jump in all standard deduction levels. Projections for 2012 indicate that the trend will continue, with increases across the board. The standard deduction for single taxpayers, heads of households and married couples filing jointly will all show increases for 2012, by $150, $200 and $300, respectively.

The standard deduction for joint filers, for example, would rise from $11,600 to $11,900. Any increase in the standard deduction, of course, can produce lower taxes by decreasing the taxpayer’s taxable income.

The additional standard deduction for those age 65 or older or who are blind will stay at its present $1,150 level in 2012 for married individuals and surviving spouses and at $1,450 for single filers, because of “rounding down.” The personal exemption amount, however, gets bumped up by inflation by $100, to $3,800 in 2012 after having increased only $50 between 2010 and 2011.

Taxpayers for many years have had to lose a good portion of the value of personal exemptions and itemized deductions when their incomes rise above certain levels, which have also been adjusted for inflation. Starting in 2010, these “phase-outs” disappeared from the Tax Code, but are only scheduled to do so temporarily and return in full force in 2013 if Congress does not act. If they had been effective for 2012, the inflation-adjusted personal exemption phase-out range would have started at $260,500 for joint filers and $173,650 for single filers and a phase-out range for itemized deductions would have started at $173,650 for all filers except married couples filing separately, who would have been subject to a $86,825 cutoff.

“The removal of limitations on itemized deductions and personal exemptions, rather than indexing of brackets, will provide major tax savings in 2012 for many well-off taxpayers,” Jones added. “The return of these limitations in 2013 would pose an equally important change in the reverse direction.”

“Kiddie” Deduction, Gift Tax Exemption
In general, inflation adjustments are rounded to the next-lower multiple of $50, so if the adjustment produces an increase of less than $50, no increase is made. The “kiddie” deduction, used on the returns of children claimed as dependents on their parents’ returns, increased only five times in the years 2001 through 2011. It last rose for the 2009 tax year. For 2012 the deduction will remain at that $950 level.

The Code only allows the gift tax exemption to rise when the inflation adjustment would produce an increase of $1,000 or more. The last increase occurred in 2009, when it rose to $13,000. It remains there for 2012.

 

CCH 2012 Tax Projections*

Married Filing Jointly (& Surviving Spouse)


Tax Rate

2012 Taxable Income

2011 Taxable Income

10%

$0-$17,400

$0-$17,000

15%

$17,400-$70,700

$17,000-$69,000

25%

$70,700-$142,700

$69,000-$139,350

28%

$142,700-$217,450

$139,350-$212,300

33%

$217,450-$388,350

$212,300-$379,150

35%

$388,350+

$379,150+

Unmarried Individuals (other than surviving spouses and heads of households)


Tax Rate

2012 Taxable Income

2011 Taxable Income

10%

$0-$8,700

$0-$8,500

15%

$8,700-$35,350

$8,500-$34,500

25%

$35,350-$85,650

$34,500-$83,600

28%

$85,650-$178,650

$83,600-$174,400

33%

$178,650-$388,350

$174,400-$379,150

35%

$388,350+

$379,150+

 Head of Household


Tax Rate

2012 Taxable Income

2011 Taxable Income

10%

$0-$12,400

$0-$12,150

15%

$12,400-$47,350

$12,150-$46,250

25%

$47,350-$122,300

$46,250-$119,400

28%

$122,300-$198,050

$119,400-$193,350

33%

$198,050-$388,350

$193,350-$379,150

35%

$388,350+

$379,150+

 Married Individuals Filing Separate Returns


Tax Rate

2012 Taxable Income

2011 Taxable Income

10%

$0-$8,700

$0-$8,500

15%

$8,700-$35,350

$8,500-$34,500

25%

$35,350-$71,350

$34,500-$69,675

28%

$71,350-$108,725

$69,675-$106,150

33%

$108,725-$194,175

$106,150-$189,575

35%

$194,175+

$189,575+

 

Standard Deduction Amounts


Filing Status

2012

2011

Increase

Married Filing Jointly
(& Surviving Spouse)

$11,900

$11,600

$300

Married Filing Separately

$5,950

$5,800

$150

Single

$5,950

$5,800

$150

Head of Household

$8,700

$8,500

$200

Standard Deduction for Dependents (“Kiddie” Standard Deduction)


2012

2011

Increase

$950

$950

$0

Personal Exemption Amounts


2012

2011

Increase

$3,800

$3,700

$100

Gift Tax Exemption


2012

2011

Increase

$13,000

$13,000

$ 0

* These numbers are projected for the 2012 tax year and have not been confirmed by the Internal Revenue Service.

 

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