2012 IRS Inflation Adjustments and other tax news

November already?!?  Time for some tax news…


2012 Inflation-adjusted Amounts: To keep pace with inflation, the IRS modified dozens of tax benefits for 2012. For example, the (1) value of each personal and dependency exemption for most taxpayers will be $3,800 (up $100 from 2011); (2) standard deduction will be $11,900 for married couples filing a joint return (up $300), $5,950 for singles and married individuals filing separately (up $150), and $8,700 for heads of household (up $200); (3) tax-bracket thresholds will increase for each filing status; (4) basis exclusion from estate tax will be $5,120,000; (5) monthly exclusion amount for qualified parking will be $240; and (6) Section 179 limit (unless Congress increases it) will be $139,000 with a phase-out threshold of $560,000. The annual gift tax exclusion will remain unchanged at $13,000. Rev. Proc. 2011-52, 2011-45 IRB and News Release IR 2011-104
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2012 Pension Plan Amounts: The IRS published cost-of-living adjustments to various pension plan and related amounts for 2012. For instance, the (1) benefit limit for defined benefit plans will increase from $195,000 to $200,000; (2) defined contribution plan limit will go up from $49,000 to $50,000; (3) compensation limit for determining benefits and contributions will increase from $245,000 to $250,000; (4) definition of a highly compensated employee will go from $110,000 to $115,000; and (5) elective deferral limit for employees who participate in 401(k), 403(b), and most 457 plans will go from $16,500 to $17,000. The following dollar limitations will stay the same—the $550 SEP contribution threshold, and the $11,500 SIMPLE elective deferral limitation. News Release IR-2011-103.


2012 Social Security Wage Base: The social security wage base will increase from $106,800 in 2011 to $110,100 in 2012. As in prior years, there is no limit to the wages subject to the Medicare tax, so all covered wages are subject to the 1.45% tax. The FICA tax rate, which is the combined social security tax rate of 6.2% (4.2% on the employee portion in 2011) and the Medicare tax rate of 1.45%, is normally 7.65%, while the self-employment tax rate is normally 15.3% (13.3% in 2011). The threshold for coverage for domestic employees will be $1,800 in 2012.


Income Tax—Rental Home Losses: Taxpayer rented her home located in another state at various times throughout the years, but in recent years she was unable to find renters due to the property's location and economic factors. During the years under audit (two to three years following the year the property was last rented), taxpayer traveled to the state several times to visit family and would advertise the house for rent. The Tax Court held that the home was held for the production of income under IRC Sec. 212 , and the taxpayer met the active participation standard of IRC Sec. 469(i) enabling her deduct her substantiated rental expenses subject to the $25,000 limit. The court reasoned that the collapse of the real estate market might negate a finding in a future year that the property was held for the production of income, but for the years under audit a possibility of gain upon sale existed from the property's appreciation and taxpayer participated in significant management decisions. Hattie Bonds , TC Summ. Op. 2011-122 (Tax Ct.).


Income Tax—Home Office Deduction: Taxpayer operated a tax return preparation business out of his home and used one room regularly and exclusively as his office as required under IRC Sec. 280A(c) . He also built a bathroom for his clients' use that is across the hall from his office. In addition to home office deductions, the taxpayer deducted wages for administrative assistance provided by his two daughters who he compensated by paying their credit card bills. The Tax Court allowed a home office deduction for the area attributable to the bedroom, but not the hallway and the bathroom since the taxpayer's children and personal guests occasionally used the bathroom. The court also denied the wage deductions since there was no evidence to substantiate the amounts paid. Luis Bulas , TC Memo 2011-201 (Tax Ct.).


Hobby or Business: In this case (Mark Blackwell , TC Memo 2011-188 (Tax Ct.)), the Tax Court found that even though the taxpayers had substantial wealth and resources unrelated to their horse breeding activities, the recreational aspects were minimal, and their horse breeding business was carried on for profit under IRC Sec. 183 . The husband and wife taxpayers cautiously spent six or seven years learning about horse breeding and management before beginning their activities and proceeded after developing a comprehensive business plan. The Tax Court’s findings included these facts & circumstances:

·        Taxpayers performed essentially all of the horse maintenance,

·        consulted and hired expert trainers,

·        made adjustments in their business plan over time, and

·        kept good books and records.

Although the losses realized in the activity were substantial, the Tax Court was convinced that the taxpayers had the potential to earn a profit. Mark Blackwell , TC Memo 2011-188 (Tax Ct.).