For a change, due to all the uproar over many issues facing Congress, there were no real changes to the tax code at year end like in many years past with the exception of Congress allowing many “extenders” from past years lapse. The only real changes were the income tax items previously included in the Affordable Care Act that were phased in during 2013. This article will focus on the key elements of tax law in place for 2013 that will affect your upcoming 2014 filings as well as a few pointers on changes for 2014 where noted.
- The current income tax rates are as follows: (10%, 15%, 25% 28%, 33% and 35% and 39.6%). The new top rate of 39.6% is imposed on taxable income over $400,000 for single filers and $450,000 for married filing joint filers.
- A 20% rate applies to capital gains and dividends for individuals in the 39.6% bracket; the 15% rate is retained for taxpayers in the 25% to 35% brackets; and, taxpayers in the 10% and 15% brackets will continue to not pay tax on qualified dividends and long-term capital gains. Keep in mind however, due to the Affordable Health Care Act which is effective for 2013, that the true effective rate for capital gains and dividends for taxpayers with incomes exceeding $400,000 for singles and $450,000 for married filing joint, an extra 3.8% Medicare surtax applies pushing the tax rate to 23.8%. Also, the additional 3.8% Medicare surtax applies to taxpayers who are subject to a 25% or greater rate on ordinary income, but whose income level falls below the $400,000/$450,000 thresholds making their effective rate 18.8%.
- Also part of the Affordable Health Care Act, for 2013, is the imposition of a .9% additional Medicare tax on the amount by which a taxpayers W-2 wages exceeds $250,000 if married filing a joint return, $125,000 if married filing separate, and $200,000 for all others. In addition, this same .9% additional Medicare tax is imposed on self-employment income as well at the same levels.
- One other change on 2013 tax returns as a result of the Affordable Care Act is the deduction threshold for unreimbursed medical expenses for taxpayers who itemize. Beginning in 2013, the threshold for medical expenses on Schedule A is increased from 7.5% of AGI to 10% unless the taxpayer or the taxpayer’s spouse is age 65 by the end of the year.
- A permanent alternative minimum tax (AMT) “patch” sets the exemption amounts for 2013 at $80,800 for married filing joint taxpayers and $51,900 for single filers. Also, relief from nonrefundable credits to offset AMT was kept. Without the patch, an estimated 26 million additional taxpayers would have owed AMT for 2013. This permanent fix kept Congress from having to extend this year after year.
- Some key tax credits for working families are in place for 2013 through 2017. Specifically, the American Opportunity tax credit which permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified and related expenses and its partial refundability, eased rules for the refundable child credit, and extended various rules related to the earned income credit for eligible taxpayers with three or more children and increased the threshold phaseout amounts for singles, surviving spouses and heads of households.
- Many of the “traditional” tax extenders that were set to expire after 2012 were extended another year for 2013. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; mortgage insurance premiums treated as qualified residence interest; above the line deduction for qualified tuition and related expenses; tax-free distributions from individual retirement plans for charitable purposes; and, exclusion from gross income of discharge of qualified principle residence indebtedness. However, these “traditional” extenders were not “extended” at the end of 2013 for the tax year 2014. So at this point for your planning, you can’t count on these for the upcoming tax year. Congress may vote to keep some or all of them in place but they have not yet done so.
- Also made permanent was the marriage penalty relief (keeping the size of the 15% bracket and standard deduction for married filing joint filers twice that of single filers) and the liberalized child and dependent care credit rules allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one.
- Personal exemption and itemized deduction phaseouts, which had previously been suspended, was reinstated with a starting threshold for those making $300,000 for joint filers and $250,000 for single filers. Under the phaseout, the total amount of exemptions claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 by which the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold. Likewise, the total amount of itemized deductions will be reduced by 3% of the amount by which the taxpayers AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.
- The estate and gift tax exclusion amount is $5,250,000 million with the top tax rate at 40%. The estate portability election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent.
I hope this information is helpful. We’ll continue through the following months with comments regarding preparation of 2013 taxes and information relevant to 2014 taxes as well including a review of the NC legislative changes for 2014.