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As inflation pries more money from consumers, it's also triggering increased tax exemptions and credits, which means lower tax bills for most taxpayers.
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updated 10/28/2011 8:04:50 AM ET 2011-10-28T12:04:50

If you think that the cost of living is increasing, it’s not your imagination. Everything is getting more expensive from gas to milk to peanut butter. Fortunately, that might translate to a drop in your tax bill. The IRS has announced a number of adjustments to tax exemptions and deductions as a result of rising inflation for the next tax year; keep in mind that these adjustments are effective for the tax year 2012 and not the 2012 filing season (the 2011 tax rates remain the same).

When you file your 2012 return, you’ll see a bump of $100 for each personal and dependent exemption; those are now $3,800. Standard deductions will also increase to $5,950 for individual filers and married couples filing separately; $8,700 for taxpayers filing as head of household; and $11,900 for married couples filing a joint return. The additional standard deduction for blind people and senior citizens remains at $1,150 for married individuals and $1,450 for singles and heads of household.

Income levels for the so-called “kiddie tax” stay put for 2012. That means that children under the age of 18, or under the age of 23 while a full-time student, are still allowed a $950 exemption for unearned income; the next $950 is taxed at the child’s rate. Unearned income over $1,900 is taxed at the child’s parents’ tax rate (in other words, your own tax rate).

Tax brackets are also expanding. Federal estate and gift tax numbers are moving, too. For 2012, the unified credit amount used to calculate the personal exemption will bump to $5,120,000 (or $10,240,000 for married couples, assuming that portability remains in play). The annual exclusion, however, will stay put at $13,000.

Some credits and exclusions are slated to increase. The adoption credit allowed for an adoption of a child with special needs will bump to $12,650; similarly, the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $12,650 (if that seems confusing, it’s because the amount of the credit for the adoption of a special needs child is not limited by expenses).

Not all credits and exclusions are going up. The child tax credit remains the same for 2012. And while the monthly limit on the value of qualified transportation benefits exclusion for qualified parking rises to $240, the value of the exclusion for transit pass expires and reverts to $125 for 2012.

For more detailed information on the increases, you can check out IRS Rev. Proc. 2011-52.

For the record, wider tax brackets and increased exemptions and credits mean lower tax bills for most taxpayers, which is a good thing. This isn’t some generous bone being tossed to voters; it’s a statutory increase due to inflation. Inflation, however, generally isn’t a good thing. Let’s hope it stays put for a bit.

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© 2012 Forbes.com

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