Tax changes strike high
WASHINGTON — Higher-income Americans and some legally married same-sex couples are likely to feel the biggest hits from tax law changes when they file their federal returns this year. Taxpayers will have a harder time taking medical deductions.
In other changes, the Alternative Minimum Tax has been patched — permanently — to prevent more middle-income people from being drawn in, and there's a simpler way to compute the home office deduction.
Tax rate tables and the standard deduction have been adjusted for inflation, as has the maximum contribution to retirement accounts, including 401(k) plans and Individual Retirement Accounts.
The provisions were set by Congress last year as part of legislation to avert the fiscal cliff of tax increases and spending cuts.
The tax legislation passed at the start of 2013 permanently extended Bush-era tax cuts for most people, but added a top marginal tax rate of 39.6 percent for those at higher incomes — $400,000 for single filers, $450,000 for married couples filing jointly and $425,000 for heads of household.
On top of that, itemized deductions and personal exemptions that are being phased out along with higher capital gains taxes — 20 percent for some taxpayers — could impact higher-earners, who will pay new taxes for health care overhaul.
The phase-out of personal exemptions and deductions doesn't begin until $300,000 for married couples filing jointly and $250,000 for singles.
Taxpayers who didn't plan could find themselves with big tax bills come April 15 — and perhaps penalties for under-withholding.
One simplification: Many investors will find it easier to report stock sales if the 1099-B forms they receive contain key details of the sale and the correct basis for computing gains and losses.
The IRS processed more than 147 million tax returns in 2013, down slightly from 2012. More than 109 million taxpayers received refunds that averaged $2,744, slightly less than in 2012.
The upward trend of electronic filing continued, with more than 83 percent of returns filed online.
The IRS continues to offer its Free File option for taxpayers with adjusted gross incomes of $58,000 or less. These taxpayers can use brand-name software to file their taxes at no cost. The agency has an option for taxpayers of all incomes — Free File Fillable Forms — which does basic calculations but does not offer guidance that a software package would.
For the 2013 tax year, the personal exemption is $3,900. The standard deduction is $12,200 for married taxpayers filing jointly, $6,100 for singles, and $8,950 for heads of household.
Many credits and deductions were extended for 2013, including several for education. Among them: the American Opportunity Credit of up to $2,500 per student for tuition and fees and deductions for student loan interest and tuition-related expenses. Many of these are phased out at higher income levels.
Schoolteachers will still be able to deduct up to $250 in out-of-pocket expenses for books or other supplies.
Taxpayers will be able to deduct medical expenses, but it will be more difficult to qualify. The threshold for deducting medical expenses stands at 10 percent of adjusted gross income, up from 7.5 percent. There's an exception for those older than 65. For them, the old rate is grandfathered in until 2017.
Home office deduction
Taxpayers who work at home will have a simplified option for taking a home office deduction.
Most claiming the deduction are self-employed, according to the IRS.
Until this year, you had to figure actual expenses for a home office, according to Weltman. “Starting with 2013 returns, if you're eligible for the deduction, you can take a standard deduction of $5 per square foot, up to 300 square feet,” she said. The maximum deduction using this method is $1,500.
Beginning this year, same-sex couples who are legally married will for the most part have to choose married filing jointly or married filing separately when doing their tax returns. This is true even if they live in a state that does not recognize gay marriage.
Many of these couples will find themselves hit by the so-called marriage penalty. For example, with incomes combined, they might hit the threshold for the extra Medicare taxes, or the beginning of the phase-out of deductions and the standard exemption.
Same-sex married couples have the option of filing amended returns going back to 2010, using the married-filing-jointly status.