Tuesday, January 21, 2014

6 Critical Changes to Note When Filing Your 2013 Taxes / Wealthy taxpayers will see the most changes in the tax code

Teresa Mears for US News World Report writes: For many people, filing taxes for 2013 is going to look a lot like filing taxes for 2012. Changes were minimal this year and, unlike in 2012, Congress did not muck up the system with a lot of new last-minute laws.

Still, some taxpayers will see changes in 2013 and, if you're in certain categories, you'll feel those changes.
"People in high-income brackets are going to get killed this year," says Jeff Schnepper, author of "How to Pay Zero Taxes." "The big changes this year are hitting the high-income earners."
Those changes include an increase in the capital gains tax, a Medicare surtax, a new Net Income Investment Tax and limits on itemized deductions for high earners, plus an increase in the top tax rate.
Expect to hear a lot of complaining and maybe see some discussion in Congress once the effect of those changes becomes clear, says Kelly Phillips Erb, a tax attorney in southeastern Pennsylvania. "Rates are reverting back to where they were 10 years ago before the Bush tax cuts," she says. "No one has felt yet how painful that's going to be."
The highest tax rate, for taxpayers who earn more than $400,000 a year, rises to 39.6 percent this year from 35 percent last year. Those same taxpayers will see the maximum capital gains rate rise from 15 percent to 20 percent, plus they'll be hit by new taxes and loss of deductions.
"All of these combined are going to boost tax levels in a way that I don't think people are expecting," Phillips Erb says. "People that make a lot of money are going to pay a lot of taxes and are going to complain a lot."
The change that is likely to have the greatest effect on taxpayers outside the top brackets is the rise in the threshold of medical expenses required to deduct those expenses. Previously, taxpayers could deduct medical expenses that reached 7.5 percent of their income. The new threshold is 10 percent. "More and more people are not going to be able to claim medical expenses," Phillips Erb says.
Same-sex couples who married in one of the states that recognizes such marriages (or in another country) are now required to file as married, either filing jointly or married filing separately. That's true even if they live in a state that does not recognize their marriage as legal.
Taxpayers who claim the home-office deduction now have an easier way to calculate that deduction, although the easier method may not garner as large of a deduction. However, it does require less record keeping. Taxpayers also have the option of sticking with the old method.
Few significant deductions vanished this year. But 2013 is the last year taxpayers can get a tax break on energy-efficient home improvements, donating an individual retirement account to charity, state and local sales taxes or supplies purchased by teachers. If you sold your house in a short sale or lost it to foreclosure in 2013, the discharged debt does not have to be claimed as income. But for 2014, unless Congress makes changes, Americans who lose their homes to foreclosure or sell them for less than they owe will owe income tax on the forgiven debt.
You can see the official IRS guidance on changes for 2013 tax returns on its website. 
The government shutdown has delayed the start of tax-filing season by 10 days, but the Internal Revenue Service will open its doors to returns starting Jan. 31. As usual, taxes are due April 15, although filing for an extension can delay that to Oct. 15 for procrastinators.
Here are six changes to be aware of when filing 2013 taxes.
• The threshold for deducting medical and dental expenses rose from 7.5 percent to 10 percent of adjusted gross income, meaning that to deduct medical expenses, those expenses have to equal at least 10 percent of your income. The exception is for taxpayers 65 and older, who retained the threshold of 7.5 percent.
• The mileage rate for business travel is 56.5 cents a mile, up from 55.5 cents last year. For medical use or moving, the mileage rate rose from 23 cents to 24 cents a mile.
• The maximum that taxpayers can save in flexible spending account is $2,500 a year. In some cases, they will be able to carry forward up to $500 in unused funds from one year to the next.
• Taxpayers who earn more than $200,000 if they are single or $250,000 for a married couple filing jointly will pay an additional 0.9 percent Medicare tax.
• Taxpayers who earn more than $200,000 if they are single or $250,000 for a married couple filing jointly will also pay a new Net Investment Income Tax. That tax is 3.8 percent of either net investment income or modified adjusted gross income – whichever is less.
• Taxpayers who earn more than $150,000 (married filing separately), $250,000 (single), $275,000 (head of household) or $300,000 (other filing status) face new limits on itemized deductions.

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