By Christina Harrison and Judy HowellKyForward contributors
We watched “The Announcement “Tuesday night on TV. looking at those five young University of Kentucky basketball players and their coach, we were reminded of how quickly things can change and how quickly an NCAA basketball championship team can be back to square one.
It just so happened that the Announcement was made on April 17, this year’s tax filing deadline. (We should have had at least one of those guys stay just to offset the pain of the tax filing deadline!) And just as things will change for the Wildcats on the court next year, things will change for all of us come tax time next year.
Just a few of the things you need to know – or reload into your brain system:
1. the Bush era tax cuts are set to expire at the end of this year. If not extended, that means that the lower income tax rates, 15 percent maximum rates on dividends and capital gains, and the repeal of the limits on personal exemptions and itemized deductions will be gone. Saying goodbye to the lower income tax rates will mean that more of your income will be taxed at a higher rate, sooner. Your income is taxed incrementally – assuming you are married for tax year 2012, the first $17,400 of taxable income will be taxed at the 10 percent rate. any taxable income from $17,400-$70,700 will be taxed at 15 percent, and so on. As a comparison, the lowest bracket in 2000 was 15 percent and you moved into the 28% bracket at $26,250. so, you need to keep an eye on what Congress does with the tax brackets, dividend and capital gain rates, and limits on personal exemptions and itemized deductions because the impact could be significant.
2. each dependent was worth $3,700 as an exemption in 2011. in 2012, that amount goes up to $3,800 (Woo-Hoo!).
3. the standard deduction amount varies by your tax filing status. If you are single, your standard deduction was $5,800 in 2011. it will be $5,950 in 2012. Compare your itemized deductions (mortgage interest, real estate taxes, etc.) to the standard deduction allowed to determine whether or not to itemize your deductions.
4. You are able to contribute $17,000 to your 401(k) – that is an increase of $500 from last year’s limit. the “catch-up” limits for those age 50 or older remain the same at $5,500. You may be eligible for a “Saver’s Credit” of up to $1,000 if your adjusted gross income falls within certain ranges.
5. the maximum credit for each qualifying child for the child tax credit remains unchanged at $1,000. the income brackets for figuring the phaseout of this credit remains unchanged.
6. Elementary and secondary school teachers were able to claim $250 in expenses against their gross income. That adjustment is gone for 2012.
7. the maximum interest deduction for education loans remains unchanged at $2,500, as does the modified adjusted gross income phaseout range.
8. the annual contribution limit for Coverdell educations savings accounts (K-12 plus college expenses) remains at $2,000. This limit is phased out based on your income, and those limits remain unchanged.
9. the maximum deduction for qualified higher education expenses was $4,000 for 2011, subject to phaseout based on modified adjusted gross income. That deduction is gone for 2012.
As I said earlier, be sure to keep your eye on what Congress does on the Bush-era tax cuts. That vote by Congress will probably be delayed until after the election, so you will still have time to adjust withholdings for 2013 if needed.
One last caution: After considering all these numbers, don’t become overloaded as opposed to reloaded! It’s never too early to get started preparing for another year.
Christina Harrison and Judy Howell, H2 Investments, are affiliated with First Kentucky Securities Corporation (member FINRA, SIPC). They have over 25 years of experience assisting individuals in meeting their investment and retirement goals.
