Among other inflationary changes made by the IRS, starting in January 2012, pension plan limits are also kicking in with the new year. These changes are part of existing federal law triggers than require cost of living adjustments in the tax code.
The biggest changes expected will include:
A $500 increase for those who place their deferred savings in recognized tax shelter accounts such as 457, 401(k) and 403(b) plans. This adjust is due to a 2012 increase of annual deposit limits in such accounts being increased now to $17,000/year. A bit of an increase on the phase out limit for those who use retirement contributions as a tax deduction. Normally the phase out occurs at $56,000 income for individuals and $66,000 for married couples filing jointly. On 2011 tax filings the limit now increases to $58,000 and $68,000, respectively, increasing the ability to score some tax savings for those affected. Similar changes occur for those who make IRA contributions through work plans. If a workplace covers the IRA contribution, the total limit for a spouse filing jointly rises to $112,000 per year. For the opposite spouse not covered and contributing, his or her IRA limit jumps to $183,000 from the old limit of $179,000. Roth IRA accounts are affected by the changes as well. Eligible married depositors who earn under $183,000 can continue to take advantage of Roths, an increase of $10,000 versus prior income limits for depositors. Individual depositors can utilize Roth accounts if earning under $125,000 a year, an increase of $3,000. These figures are based on adjusted gross income, not total gross income.
All of the above changes are to be incorporated in the rules, forms, and formulas of tax forms for the 2011 tax year due in 2012 from tax filers.
For planning purposes, the best approach to take involves estimating how much will be deferred or deposited into retirement accounts ahead of time based on normal practice already followed. This will then identify the monetary gap, if any, that will occur given the new changes versus the old. Tax filers should also take into account any changes that have been made by them to deferrals from payroll or their normal schedule of deposits in IRAs, etc.
Even if a tax filer uses a financial adviser to plan deposits and related details, it doesn’t hurt to follow up and have a discussion with the personal adviser on current status, what the tax code changes mean, and if any planning changes need to be made. Many advisors take a general rule of thumb and map out deposits versus limits just using a basic spreadsheet model. As a result, planning mistakes can and do occur since many advisers are handling multiple client accounts at any given time. Tax filers are well served by paying attention to expected portfolio planning and double-checking that the scheduled deposits are work as originally agreed upon.
Those going about the changes on their own can do so on a spreadsheet program. Most IRA or approved retirement plan services provide summary reports on personal accounts regarding how much has been deposited to date in a tax shelter account. For those with multiple accounts, one simply has to add the totals together on a spreadsheet to see if the aggregate is close to the new limits or far off. Then adjustments can be made to deferrals accordingly.
Trying to figure out the tax deduction savings possible are a little trickier. Much depends on whether the tax filer will be earning income close to the adjustment limits for retirement account tax deduction income limits or not. If your gross income expected is well over the income limit, even the new one, don’t bother. You won’t get the tax deduction; you’re ineligible. If below or close, the best bet is to then take last year’s adjusted gross income, modify it for any known income changes in the current year, and compare to the limits. If applicable, then you take the deduction amount, reduce the adjusted gross income and compare it to the tax tables to figure out tax liability. For most the change may result in a savings of $50 to $100. It’s a lot of work to plan a small savings amount. It’s better to wait for tax time to crunch the related calculations.
Sources:
Mother Nature Network; IRS Announces Tax Changes for 2012; Melissa Hincha-Ownby; October 2011.
U.S. Internal Revenue Service: IRS Announces Pension Plan Limits for 2012