New Tax Rates and Adjustments for 2012 Income and Estate Planning
Many lawyers, tax professionals, and financial planners around the USA are focused on the new tax laws, changes, adjustments, and rates.
While the tax rates and estate taxes are presently fair for most Americans, the estate taxes are set to rocket up in 2013 if changes do not occur. This will dramatically affect family, succession and business planning if nothing is done by the President or Congress to mitigate the harm.
For example, if you are a single parent with 5 children and own a "store or business which is valued at 5 million dollars, the tax on that estate may go from zero up to over 2.5 million dollars. This type of tax problem forces the closure of many businesses to pay taxes. However, it also forces many Americans to buy millions in insurance so that they can pay the government to the taxes to keep their homes, estates, and businesses.
As for income taxation, many Americans may not owe anything at all if they effectively use their exemptions, deductions, EITC credits, interest deductions for home and student loans, lifetime learning credits, medical savings accounts, and so forth. See Below. However, for those families who are earning more than approximately 100,000 dollars per year, many of the benefits are phased out. The ability to deduct student loan interest, as an example, is phased out for families who earn more than 120 thousand dollars in Modified Adjusted Gross Income ('MAGI') and eliminated if your modified adjusted gross income is more than $150,000. The MAGI threshold at which the LLC lifetime learning credit begins to phase-out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
New rules affecting most 2012 returns:
The value of each personal and dependent exemptions, available to most taxpayers, is $3,800, up $100 from 2011. The new standard deduction is set at: $11,900 for married couples filing a joint return, is up $300, $5,950 for singles and married individuals filing separately, is up $150, and $8,700 for heads of household, up $200. Most taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
The tax-bracket thresholds also increase for each filing status. With a married couple filing a joint return, for illustration, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
Credits, deductions, and other related phase outs.
For tax year 2012, the highest earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
For those working outside of the country, the foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
For year 2012, the annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below.
For 2012, the $2,500 maximum deduction for interest paid on higher education student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase-out ranges remain at the 2011 levels.
Estates and Gift Taxation
For an estate of any decedent dying during the calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use 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 from $1,020,000 for 2011. The portability provisions are effective for 2012 but may expire beginning 2013.
Going beyond 2012 is where the problem begins in 2012:
The annual exclusion for non-taxed gifts remains at $13,000 from each recipient to another.
Other Tax Concerns
Overall, taxes remain a central focus of the elections and government policy during these most difficult economic times. For example, the totality of taxes from: State, Federal, City, Utilities, Real Estate, Gasoline, Service Taxes on Phone, Internet, Cable, Luxury Taxes and the rest of personal and business taxes could still putting many average working Americans into 50% or higher tax rates. Then, there is the pending tax rate on the estates of Americans. While there is no tax due if you leave everything to your spouse, when the surviving spouse dies, this is where the big problems can begin.
Families with larger estates should analysis whether they need to reinstitute their Bypass and Marital Trusts again if the estate tax exclusion goes back to the Clinton Rates of 1 Million. Further, any estate tax portability provisions would be eliminated and the gift tax rates would skyrocket. In the end, very exotic insurance trusts may become fashionable again very soon.
Source: Details on these estate taxes and inflation adjustments can be found in on the IRS website here:
Dr. George Mentz is a world recognized wealth management commentator and professor who has authored several revolutionary books. Prof. Mentz, an international attorney, has been a keynote speaker globally in Asia, Arabia, USA, Mexico, Switzerland, and in the West Indies. Mentz can be contacted for speaking engagements at www.gmentz.com or www.managementconsultant.us
*No tax investment or legal advice provided herein. Please consult with a licensed professional in your jurisdiction before making any important financial or legal decision.
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