INFLATION REMAINS LOW: IRS RELEASES TAX NUMBERS FOR 2012Jan 19th, 2012 | By Submitted | Category: Editorials
By Mark Mark Buescher, C.P.A.
Last week in this column, I indicated that 2012 could be a year of optimism relative to North Florida economic conditions. I addressed various segments of the economy including favorable Florida employment numbers recently released by the governor.
One area that I did not address was that of inflation. Fortunately, our current rate of inflation remains at historically low averages and has been a ray of sunshine as well. Through November, 2011, the average inflation rate for the year was 3.4%, based on the most recent figures produced by the U.S. Bureau of Labor Statistics. December figures will be available in the next few days, but are expected to be comparable.
When inflation is low, consumers and businesses are better able to make long-range plans because they know that the purchasing power of their money will hold and will not be steadily eroded year after year.
Low inflation also means lower nominal and real interest rates. Lower interest rates reduce the cost of borrowing and, in turn, encourages households to buy durable goods, such as automobiles and refrigerators. By keeping inflation under wraps, our economy will eventually gain a stronger foothold and we will eventually return to prosperity.
But we, as consumers and taxpayers, are not the only ones that keep a watchful eye on inflation. The IRS closely monitors the rate as well. Our tax laws require that certain tax numbers be adjusted for inflation each year. Most of these numbers are unchanged or change slightly for 2012 since inflation was minimal for 2011. However, there are a few worth noting as we consider tax planning this year.
For example, the standard mileage rate for business driving remains at 55.5 cents for 2012. For 2011, it was 55.5 cents for miles driven after June 30 and 51 cents for miles driven before July 1. This rate is important since employees use the rate for reimbursement purposes from their employers and business owners use it in computing their deductions.
The rate for medical and moving mileage decreases from 23.5 cents per mile to 23 cents per mile. The general rate for charitable driving remains at 14 cents per mile.
Unfortunately, the maximum earnings subject to social security tax increases slightly. Employees “max out” on social security tax withheld from their paychecks once their earnings reach $110,000, up by $3,300. The earnings limit for those under full retirement age is $14,640. For those at full retirement age, there is no earnings limit.
The “nanny tax” threshold increases to $1,800 for 2012, up from $1,700 in 2011. If you pay household workers more than this amount during the year, you are responsible for payroll taxes. Included are workers such as gardeners, baby sitters, nurses, or those that perform general household chores.
The “kiddie tax” on the other hand is unchanged for 2012. If your child under age 19 (under age 24 for students) has more than $1,900 of unearned income, such as dividends and interest income, the excess could be taxed at the parents top rate.
On the downside, certain limits that we would like increased, however, remain unchanged due to low inflation. The maximum individual retirement account (IRA) contribution you can make for 2012 remains unchanged at $5,000 if you are under age 50 and $6,000 if you are 50 or older.
The maximum amount of wages employees can put in a 401(k) plan for 2012 increases to $17,000. If you are 50 or older, you can contribute up to $22,500 to a 401(k) and $14,000 to a SIMPLE plan.
Tax legislation could change these and other important tax numbers at any time. Also, keep a watchful eye on inflation. If the economy tends to warm up a bit more, inflation could begin to raise its ugly head higher. After all, inflation affects our finances from many different prospective, including that of taxation.
Mark Buescher, CPA is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.