There aren’t too many across-the-board changes affecting taxpayers filing their 2013 returns. However, that doesn’t mean there aren’t any major changes – or that higher income brackets won’t be paying more.
The George W. Bush era tax cuts are going away for those in the upper income brackets, and there are new taxes to help pay for health care reform. Various income thresholds have been established for these new taxes. For example, an additional 0.9 percent Medicare tax will be levied on earnings over $250,000 for married couples filing jointly, and for singles earning more than $200,000. Investment income will be subject to a 3.8 percent tax, and higher income taxpayers will also wave goodbye to certain itemized deductions and exemptions.
Middle and lower income taxpayers probably won’t see a big difference from last year’s tax bill, although many will benefit from changes to the tax code. The Alternative Minimum Tax (AMT), which has hovered over middle-income Americans for several years, has been fixed once again – dare we say permanently – to prevent it from affecting unintended targets. And changes have been made to make it easier to make home office deductions. Here’s an overview of some key changes.
- The highest rate for taxpayers who earn more than $400,000 a year increases to 39.6 percent, up from 35 percent for 2012 filings.
- The maximum capital gains tax rate increases to 20 percent, up from last year’s 15 percent.
- The phasing out of personal deductions and exemptions begins at $300,000 for married couples filing jointly and $250,000 for single taxpayers.
- Taxpayers may deduct medical expenses on 2013 tax returns only when medical costs have surpassed 10 percent of their adjusted gross income. Previously, the threshold was 7.5 percent of adjusted gross income. Taxpayers who are 65 years old or older keep the previous lower rate of 7.5 percent.
- Married same-sex couples are now required to file as married, though they can file as “married filing separately” if they choose to do so. Although this means same-sex couples may get hit with the “marriage penalty,” they are now eligible for the head-of-household tax status and can get health insurance using pre-tax income for a spouse.
- Claiming a home office deduction has been simplified. You are allowed to deduct $5 per square foot up to a maximum of 300 square feet (maximum deduction is $1,500). If you opt for this simplified formula, it’s a one line entry on Schedule C instead of a 43-line form. To be eligible, you must have a designated area in your house used regularly and exclusively for business.
Tax filing season begins on Jan. 31 –a little later than usual because of the government shutdown. The deadline remains April 15, and the experts recommend filing as soon as possible to give identity thieves less chance to hijack your Social Security number to file a fake return.
The comments above are general and are not an exhaustive list of all the changes or a substitute for professional advice from a tax expert.