Inflation and Taxes

Can you believe that inflation could produce tax savings? Believe it or not, it’s possible. Starting in 2012, various deductions, exemptions and exclusions will be adjusted (i.e. increased) for inflation, which could produce increased tax savings from 2011 amounts.

Retirement Plans-for 2012, the maximum 401(K) contribution increases from $16,500 to $17,000. For individuals who participate in employer sponsored retirement plans, and also make traditional IRA contributions, the income phase out range will increase from $56,000 through $66,000 for a single taxpayer in 2011, to $58,000 through $68,000 in 2012. For married taxpayers, the phase out increases from $90,000 through $110,000 in 2011, to $92,000 through $112,000 in 2012. What this means in plain English is that it’ll take more income in 2012 to phase out the deductible IRA contribution than it does for 2011.

Income Tax Brackets-though it’s anybody’s guess when (or if) tax rates will change from the current 10, 15, 25, 28, 33, and 35 percent amounts, inflation will have an effect of lowering tax bills, based on having more income fall into lower brackets in 2012 than they do for 2011.

Standard Deduction-for taxpayers who don’t itemize deductions, the standard deduction for single taxpayers will increase from $5,700 in 2011 to $5,950 in 2012. For married taxpayers, the increase will be from $11,400 to $11,900.

Personal Exemptions-these will increase from $3,700 in 2011 to $3,800 in 2012.

Estate Tax Exclusion-the current $5,000,000 exclusion will increase to $5,120,000 in 2012.

Gift Tax Exclusion-sorry, gotcha on this one! The annual gift tax exclusion will remain at $13,000 ($26,000 for married taxpayers who elect gift-splitting).

While none of these represent any giant tax windfalls to taxpayers, any opportunity to save a few bucks in taxes is a good thing, right?

How are you going to save more in taxes in 2012? Let me know, or else feel free to leave other tax related comments. As always, feel free to suggest a topic for a future article.

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