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Ready Or Not, 2012 Tax Breaks Are Already Here

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in Tax Matters

Every year we hear what sounds like good news: the IRS makes an announcement that the standard deduction and personal exemption amounts for the following year have increased due to an inflation adjustment. And this year was no exception, as we recently got word that the 2012 amounts have gone up. Gee, aren't you excited? For the rest of the story, read on. Most U.S. taxpayers take the standard deduction on their federal personal income tax return. For example, on your 2011 return, the standard deduction is $11,600 if your filing status is married filing joint (MFJ), $5,800 if you are single, and $8,500 if you are head of household (HOH). For 2012, the standard deduction amounts will be as follows: $11,900 for MFJ, $5,950 for single filers, and $8,700 for HOH. I bet you are so excited now, you don't know what to do with yourself! Let's put my sarcasm aside and take a look at what all these numbers really mean. For a married couple, you've just increased your standard deduction by $300. Pardon me for stating the obvious, but let's remind ourselves that we are discussing a tax deduction here, not a tax credit. So while an increase in a deduction is a good thing tax-wise, it does not mean that you received $300. Instead, it means that you reduced your taxable income by $300. Your actually tax savings will be the increase in the deduction amount multiplied by your marginal federal income tax rate. If you are in the 15% tax bracket, you just saved $45 ($300 x 15%). If you're in the 25% tax bracket, you got a $75 tax break ($300 x 25%). Of course, every little bit helps, right? Seventy-five bucks is seventy-five bucks. That's enough for a nice dinner for two (and maybe a movie, too). And over the span of many years, these inflation adjustments do add up. It is nice to know that the government is doing "the right thing" by making sure that these standard deduction amounts are keeping pace with inflation. The personal exemption amount has also been raised, going from $3,700 in 2011 to $3,800 in 2012. So again we have an increase in a deduction. This $100 increase results in a $15 or a $25 tax savings (if you are in the 15% or 25% tax brackets, respectively). And again, nothing to get too excited about, but enough for the IRS to inform us about it. These annual changes in the standard deduction and the personal exemption amounts may not be significant, but at least they are fair. Now that January is already here, why not take that $75 and go buy yourself something nice -- what are you waiting for?

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