Jason Schneider
Attention, early birds.
It's time to start getting organized for one of America's least popular annual events: wrestling with income-tax forms and instructions.
On Jan. 31, the Internal Revenue Service began accepting returns for 2013. Officials expect to receive more than 148 million returns this year. If history is a guide, many of those returns will include costly errors.
Thanks to the ever-growing complexity of federal, state and local tax laws, regulations and court cases, it's easier than ever to make mistakes, including overlooking valuable tax breaks. The standard federal tax publication issued by CCH, a Wolters KluwerWTKWY +0.74% unit, now totals a record 74,608 pages, up from 73,954 pages in 2013—and about 60,000 in 2004.
"There were some big changes in 2013," especially for taxpayers in the top brackets, says Gregory A. Rosica, a tax partner at Ernst & Young. But even those who aren't affected by these changes may find the task more daunting if they had a major life change, such as a marriage, divorce or job loss.
Here are a few major changes and thoughts from tax experts on how to reduce your chances of bloopers:
Higher tax rates: They began last year for many high-income taxpayers on ordinary income, capital gains, interest and dividends.
For example, the top statutory rate on ordinary income rose to 39.6% from 35% the prior year. This affects singles with ordinary taxable income of more than $400,000 and married couples with more than $450,000 (or half that if married and filing separately).
Capital-gains rates became more complex.
But there remains a zero rate on capital gains and dividends "for taxpayers taxed in the 10% and 15% brackets for ordinary income," says the EY Tax Guide 2014. This can be surprisingly deep water. See IRS Publication 550 for more details (and there are many).For taxpayers in the highest bracket, the top tax rate on long-term net capital gains and qualified dividends rose to 20% from 15% the prior year. (To qualify as a long-term capital gain, the investment must have been owned for more than a year.)
Many upper-income taxpayers also will get hit by a new 3.8% "net investment income tax." This applies to the lesser of net investment income or the excess of your adjusted gross income (with certain modifications) over $125,000 if married filing separately, $250,000 if married filing jointly and $200,000 for any other filing status.
And there is also an additional 0.9% Medicare tax on wages, other compensation and self-employment income.
Stealth taxes: There are new limits on itemized deductions and a phaseout of personal exemptions for taxpayers with income above certain amounts.
They're known as stealth, or backdoor, increases because they typically attract less attention among voters than tax-rate increases.
For example, the maximum personal exemption for 2013 is $3,900 per dependent. But you lose at least part of it if your adjusted gross income is more than $250,000 for singles, $300,000 for married individuals filing jointly, or $150,000 if married filing separately. The personal exemption phaseout is known as PEP for short. The limits on itemized deductions are known as "Pease," after a former Ohio congressman.
Medical expenses:Many people under 65 with large medical bills will discover they can't deduct as much as they could a year ago.
That's because the threshold has increased. For 2013, taxpayers under 65 can deduct their unreimbursed medical and dental expenses only to the extent they exceed 10% of adjusted gross income. That's up from a 7.5% threshold the previous year.
Example: Suppose you had $5,000 of unreimbursed medical bills last year. Your adjusted gross income for 2013 was $50,000. Result: You couldn't deduct any medical bills because your bills didn't exceed 10% of your adjusted gross income.
But the threshold generally remains 7.5% if either you or your spouse were 65 or older—unless you are ensnared by the alternative minimum tax.
Home sweet home: Did you work from home? If so, you might benefit from "a new, simplified home-office deduction form," says Mr. Rosica of Ernst & Young.
He is referring to an optional new method to calculate the deduction. Tax experts say it's simpler and eliminates burdensome record-keeping rules.
But, as Mr. Rosica points out, "it limits your deductions to $1,500." Thus, many people may be better off choosing the more complex, old-fashioned way. See IRS Publication 587.
EITC stands for earned income tax credit, a program designed to help the working poor. It's aimed at millions of individuals and families who made $51,567 or less last year. But the IRS has estimated about one out of five eligible workers and families miss out on this credit.
"Many people don't realize they are eligible and simply overlook this credit," IRS Commissioner John Koskinen said.
Some don't claim it when they file, while others don't file at all because their income falls below the filing requirement. To get the credit, you have to file. The EITC is a "refundable" credit, which means you may get a refund even if you don't owe any tax.
"One-third of the population eligible for EITC shifts each year as their personal circumstances, such as work status or family situation, change and can affect eligibility," the IRS said.
The amount depends on income, family size and filing status (visit www.irs.gov/eitc).
"Last year, over 27 million eligible workers and families received more than $63 billion total in EITC, with an average EITC amount of $2,300," the IRS said.
Same-sex couples: Following a major Supreme Court decision last year, the IRS issued a revenue ruling on the subject.
"If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage," the IRS says in Publication 17.
Some people might even be eligible to file amended returns to change their filing status for certain earlier years.
Electronic filing:"The best way to get your refund is to e-file your return and opt for receiving your refund via direct deposit to your bank account or another designated account," says Barbara Weltman, an attorney and author of J.K. Lasser tax guides.
E-filing also typically results in far fewer errors than returns filed on paper. And when you e-file, you get an IRS acknowledgment that your return has arrived.
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