The IRS announced recently that relief may be ahead for taxpayers due to a sharp increase in the inflation index. The changes are due in 2012 and will be realized on the return you would ordinarily file in April of 2013. By law, the IRS must review certain tax provisions in the tax code and keep pace with the cost of living. Several common reductions of income are to increase in the form of the standard personal and dependent exemption, the standard personal deduction, as well as an increase to tax-bracket thresholds applied to income. Some reductions to taxable income will increase in the form of tax credits.

The increase in exemptions and deductions will reduce the Adjusted Gross Income (AGI) number, the number used to calculate taxable income. The increase in tax-bracket thresholds means that more of your income will be taxed at a lower tax rate than before. These are known as “above the line” (above the AGI number) reductions of income used to calculate the AGI.

A few tax credits and deductions along with the related phase outs will increase as well. These are referred to as “below the line” credits as they reduce taxable income (calculated using the AGI number) dollar for dollar. Below is a brief list of the changes:
Exemptions and Deductions:
• Personal and Dependent Exemption will increase to $3,800. An increase of $100 from the previous year.
• Standard Deduction increases to $11,900 for Married Filing Jointly (MFJ)**, a $300 increase, for Singles (S) or Married Filing Separately (MFS) the amount will be $5,950, up $150, and for Head of Household (HOH ) the amount will be $8,700, up $200 from the previous year.
o **The IRS cites that nearly 2/3rds of Americans take the standard deduction versus itemizing deductions on Schedule A. As of now, the IRS has not released information relating to tax breaks for those who itemize.
• Tax Bracket Increases: One example for a MFJ return, the threshold between the 15% bracket and 25% bracket increases from $69,000 to $70,700, meaning that an additional $1,700 of this income would be taxed at the lower rate.
Credits and Phase Outs:
• Earned Income Tax Credit (EITC) will be $5,891, up $140 from the previous year.
• Foreign Earned Income Deduction will go to $95,100, a $2,200 increase. The IRS is also currently running an amnesty program targeting foreign earned income, so this appears to be an additional incentive to comply with foreign earned income disclosure.
• The Modified AGI phase out for the lifetime learning credit increases to $104,000 for joint filers, and $52,000 for singles and head of household.
There are a few notable other items including, increases for annual deductible amounts in Medical Saving Accounts, a slight increase for the Estate Tax Exclusion (although, annual exclusion for the Gift Tax remains at $13,000), and some small changes to qualified transportation and parking benefits as provided by an employer. For a complete understanding of any changes that may affect you, please consult a qualified tax professional or you tax preparer. More preliminary detailed information may be found here. This information is scheduled to be published in the Internal Revenue Bulletin 2011-45 on November 7th, 2011.

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