Federal Income Tax Brackets and Marginal Rates
2012 Federal Income Tax Brackets and Marginal Rates
- Take advantage of eligible tax breaks to help increase your take-home pay.
- Learn more about common tax breaks, including retirement plan contributions, charitable giving and more.
To keep pace with inflation, the IRS has widened the federal income tax brackets and increased certain exemptions, deductions and credits1 (see table below). For additional information, please visit the IRS Website.
2012 Federal Income Tax Brackets
|Marginal Tax Rate||Taxable Income|
|10%||$8,700 or less||$17,400 or less|
|15%||Over $8,700 but not over $35,350||Over $17,400 but not over $70,700|
|25%||Over $35,350 but not over $85,650||Over $70,700 but not over $142,700|
|28%||Over $85,650 but not over $178,650||Over $142,700 but not over $217,450|
|33%||Over $178,650 but not over $388,350||Over $217,450 but not over $388,350|
|35%||Over $388,350||Over $388,350|
Take advantage of lower tax rates for children
In 2012, children under 19 will pay no federal income tax on the first $950 of unearned income (such as capital gains or interest) and will be taxed at their own rate on the next $950 (0% for long-term capital gains and most likely 10% on other unearned income). However, they will be taxed at their parents’ tax rate on unearned income in excess of $1,900. (This will also be the case for full-time college students under age 24, unless their earned income is greater than one-half of their parents’ support.)
Individuals age 19 and older (and dependent full-time college students age 24 and older) pay taxes at their own rate. If they’re in the 15% ordinary bracket or below, that means 0% tax on long-term capital gains and qualified dividends through 2012, unless Congress changes the law before then.
As the table below shows, the federal government increased the maximum amounts you can contribute to certain retirement accounts.
2012 Federal Limits for Retirement Accounts
|Account||Contribution Limit||Additional catch-up contribution for people age 50 and older|
|401(k), 403(b) and 457||$17,000||$5,500|
|QRP/Keogh and SEP-IRA||20% of net self-employment income (or 25% of compensation) up to $50,000||None|
|Individual 401(k)||20% of net self-employment income (or 25% of compensation) plus $17,000, up to $50,000||$5,500|
|Traditional IRA and Roth IRA||$5,000||$1,000|
A few things to note about contribution limits:
- Traditional IRAs– Money you put in a traditional IRA is generally tax-deductible unless you’re an active participant in a qualified workplace retirement plan, such as a 401(k) or 403(b). In that case, restrictions apply. If you’re a single filer, your contribution is partially deductible if your modified adjusted gross income (MAGI) is between $58,000 and $68,000. If you’re a married couple filing jointly, your 2012 contribution is partially deductible if your MAGI is $92,000 to $112,000. If you don’t participate in a retirement plan at work (but your spouse does) and you file jointly, your contribution is partially deductible if your MAGI is $173,000 to $183,0002.
- Roth IRAs– If you’re a single filer and your MAGI is $110,000 or less, your contribution limit is $5,000 (or $6,000 if you’re 50 or older) in 2012. The contribution limit is gradually reduced for those with MAGIs of $110,000 to $125,000. If you’re a married couple filing jointly and your MAGI is $173,000 or less, your contribution limit is $5,000 ($6,000 if you’re 50 or older). That contribution limit is gradually reduced for those with MAGIs of $173,000 to $183,000.
Anyone can convert a traditional IRA to a Roth Ira regardless of income level or filing status. Converting all or part of a traditional IRA into a Roth IRA could be advantageous if you expect to be in the same or higher tax bracket when you eventually withdraw the money, have a reasonably long time horizon, and can afford to pay the conversion tax from a source other than your IRA at the time of conversion.
Manage college expenses with these nifty tax benefits
Consider these tax-favored ways to pay for college costs:
- A Coverdell education savings account– If you’re a single filer, you may make a maximum contribution of $2,000 per year per child if your MAGI is $95,000 or less—the maximum allowed contribution is gradually reduced for those with MAGIs of $95,000 to $110,000. If you’re a married couple filing jointly, you may make a maximum contribution of $2,000 per year to a Coverdell if your MAGI is $190,000 or less, with the maximum allowed contribution gradually reduced for those with MAGIs of $190,000 to $220,000. Be careful when accounts are established by different family members for the same child. Total contributions may not exceed $2,000 in any one year.
- A529 college savings plan– Although there’s no limit to how much you can contribute each year, each state’s plan has its own lifetime limit—typically more than $200,000 per designated beneficiary3. You can also treat a 529 contribution as being made over five years for gift tax purposes. So a married couple could contribute up to $130,000 per child up front without using any of their lifetime gift tax credit (see below).
- Tax credits– The American Opportunity Credit is a modification of the Hope Credit and makes the credit available to a broader range of taxpayers, including many individuals with higher incomes and those who owe no tax. For 2012, you may claim up to $2,500 on eligible college expenses paid from a non-529 account. The American Opportunity Credit phases out for single filers with MAGIs of $80,000-$90,000 and $160,000-$180,000 for married couples filing jointly. The Lifetime Learning Credit is 20% of the first $10,000 of qualifying education expenses. The Lifetime Learning Credit phases out for single filers with MAGIs of $52,000-$62,000 and $104,000-$124,000 for married couples filing jointly.
- Tax Deductions– You may be able to deduct up to $2,500 of student loan interest. The MAGI phaseout for eligibility is $60,000 to $75,000 for single filers and $125,000 to $155,000 for married couples filing jointly.
Plan your gifts and estate to make the most of these tax breaks
- The gift tax annual exclusion amount remains unchanged for 2012. You generally can give up to $13,000 annually (or $26,000 for spouses splitting gifts) to any number of people, and none of the gifts will be taxable. You can also give unlimited amounts toward tuition or medical expenses if you pay the provider directly. Beyond that, the lifetime gift and estate tax exemption increases to $5.12 million in 2012. The top gift and estate tax rate remains at 35% (see table below).
- Many of your estate planning decisions may depend on what you think Congress might do for tax years after 2012. That’s anyone’s guess, of course. We could revert back to the old law, or we could end up with currently higher limits for taxable estates. As frustrating as the uncertainty might be, the best you can do is plan based on what you know now. Remember, any guess about the future is still just a guess, and the law as it stands is still the law.
Estate and Gift Tax: 2012-2013
|Highest Rate||Exemption||Highest Rate||Exemption|
|2012||35%||$5.12 million||35%||$5.12 million|
|2013||55%||$1 million||55%||$1 million|
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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