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Estate Tax Exclusion to Rise: IRS Inflation Adjustments for 2012

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Thank inflation. Personal exemptions and standard deductions are set to rise and tax brackets to widen for tax year 2012, according to an IRS announcement last week. 

In order to keep pace with inflation, the dollar amounts for various tax provisions by law must be revised each year. Those affecting 2012 returns include these:

  • The value of each personal and dependent exemption available to most taxpayers is $3,800, up $100 from 2011.
  • For the nearly two out of three taxpayers who take the standard deduction rather than itemize their deductions, the new standard deduction is $11,900 for married couples filing a joint return, $5,950 for singles and married individuals filing separately, and $8,700 for heads of household—up $300, $150 and $200, respectively.
  • Tax-bracket thresholds increase for each filing status. For example, the taxable-income threshold separating the 15% bracket from the 25% bracket for a married couple filing a joint return is $70,700, up $1,700 from 2011.
  • For the estate of any taxpayer who dies during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5 million for 2011. If the executor employs the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up $20,000 from 2011. The annual exclusion for gifts remains at $13,000.

Credits, deductions and related phase outs also are set to expand for tax year 2012:

  • The maximum earned income tax credit (EITC) for low- and moderate-income workers and working families rises to $5,891, and the maximum income limit for the EITC rises to $50,270.
  • The foreign earned income deduction rises to $95,100.
  • The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers and $52,000 for single filers and heads of household.
  • Annual deductible amounts for Medical Savings Accounts increase to these amounts: Minimum $2,100 (self) and $4,200 (family); maximum $3,150 (self) and $6,300 (family); maximum out-of-pocket $4,200 (self) and $7,650 (family).
  • The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000. For single taxpayers, the phase out ranges stay at the 2011 levels.

Last week, the IRS also announced cost-of-living adjustments affecting contribution limitations for pension plans and other retirement-related items for fiscal 2012, while the Treasury Department’s Inspector General for Tax Administration reported that millions of taxpayers erroneously took an education tax credit that will cost them billions of dollars.