Suppose you entered a tax law trivia contest and were asked this question: What three common numbers change every year, affecting the amount of federal income tax you pay?
Would you draw a blank?
Or would you answer standard deduction, exemptions, and income tax brackets.
Those three figures, part of every federal individual income tax return, are adjusted for inflation annually—and they’ve changed again for 2012. The new numbers will apply to the tax return you’ll file in April of 2013.
Standard Deduction. When the amounts you pay for deductible items such as mortgage interest and taxes is not enough for you to itemize, you instead subtract a standard amount from your adjusted gross income to compute taxable income. The standard deduction is based on your filing status, your age, whether you can be claimed as a dependent on another person’s return, and blindness.
In 2012, the basic standard deduction when you’re single is $5,950. It’s $11,900 when you’re married and file a joint return.
Exemptions. You claim an exemption for yourself, your spouse if filing a joint return, and your eligible dependents. For 2012 each exemption will reduce your adjusted gross income by $3,800.
Income Tax Brackets. Your federal income tax bracket—the rate of tax you pay on the last dollar of your income—is based on your filing status and taxable income. For 2012, the amounts for each bracket went up. That means you can earn more income and stay in a lower tax bracket during 2012—a tax savings.
Maybe your trivia question answer included other items, such as pension plan contribution amounts or standard mileage rates for driving your business vehicle. You’d still be right. According to a leading tax information publisher, under current federal tax law more than 50 inflation adjustments are required each year. That number will increase as more regulations and changes to the tax code come into play, including the health care laws that are slated to take effect in 2013.