Some Tax Changes for 2012

Some Tax Changes for 2012

Basic Individual Income Tax Changes

• The individual and dependent exemption is going up by $100 to $3,800.

• The standard deduction (if you don't itemize) goes to $11,900 for married filing joint, $5,950 for married filing separately and singles and $8,700 for heads of household.

• All tax-bracket thresholds will increase. For example, the upper most limit of the 15% rate will be $70,700, up from $69,000 in 2011.

Credits, Deductions and Related Phase-Outs

• The sales tax itemized deduction expires in 2011. Up until December 31, 2011, taxpayers who itemized had a choice of taking a deduction for sales tax or for state income tax. This particularly important for states such as Nevada, Wyoming, Washington, South Dakota, Texas, Alaska and Florida who have no personal income tax. With the sales tax deduction, residents of these states still got a deduction. This choice goes away in 2012.

• The mortgage interest premium (also known as PMI) deduction

expires in 2011. It will not be deductible in 2012.

• The educator expense deduction of $250, available to teachers who purchase classroom supplies and other materials out of their own pocket, is going away after December 31, 2011.

• Maximum earned income tax credit (EITC) rises to $5,891. The maximum income limit for EITC goes to $50,270.

• The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.

• The modified adjusted gross income threshold at which the 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.

Some recent questions from my blog:

QUESTION: Can a person take 1031 exchange monies and partner with another investor on a like property? If so, how would this look and be set up? Say I have $100k to 1031 and want to buy a property with a partner that also brings in $100k to invest.

ANSWER: Yes you may. Partial interests qualify for exchanging within the scope of Section 1031 of the Internal Revenue Code. However, if your interest is not in the property but an interest in the partnership which owns the property, your exchange would not qualify. This is because partnership interests are excluded from Section 1031. But don't be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify. Another caveat, those individuals or groups owning partnership interests who desire to complete an exchange, and have for tax purposes, made an election under IRC Section 761(a) can qualify for deferred gain treatment under Section 1031. This can be a tricky issue!

QUESTION: Over the years, it's been told to me over and over that taking the mileage deduction is better than the alternative of expensing a vehicle (forgive me if I got the term wrong. Recently, some highly successful investors have told me they do better by expensing their vehicle. Does anyone use the non mileage approach? Can you share under which variables it is superior to taking the mileage deduction?

ANSWER: I look at both scenarios for my clients and decide which is the better option. Just remember that with the actual expenses, you will need to allocate only a portion of those expenses that relate to the business.

I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at WEALTH BUILDING PLAN