As 2013 rang in, so did a significant number of changes to the tax laws. To help you prepare for next tax season, take note of these important changes for tax year 2013.
New income tax rate of 39.6 percent. Taxpayers whose income exceeds $450,000 ($425,000 if head of household, $400,000 if single, $225,000 if married filing separately) will be subject to the 39.6-percent rate.
Limitation on itemized deductions. Itemized deductions for taxpayers with adjusted gross income (AGI) above $300,000 ($275,000 if head of household, $250,000 if single, $150,000 if married filing separately) will be reduced by 3 percent of the amount of income over the threshold.
Additional Medicare tax. A 0.9 percent additional Medicare tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income for taxpayers with modified adjusted gross income (MAGI) of $250,000 ($200,000 if single or head of household, $125,000 if married filing separately).
Net investment income tax. Taxpayers may be subject to the net investment income tax (NIIT) — a 3.8-percent tax on the lesser of net investment income or the excess of MAGI over $250,000 ($200,000 if single or head of household, $125,000 if married filing separately). The NIIT does not apply to nonresident aliens.
Medical and dental expenses. Taxpayers can deduct only the part of their medical and dental expenses that exceeds 10 percent (7.5 percent if either spouse turns 65 before the close of the tax year) of the amount on line 17. This deduction does not apply to nonresident aliens.
Adoption credit and adoption assistance. The maximum adoption credit is $12,970, and the maximum amount of adoption assistance that can be excluded from gross income is also $12,970. The amount of the credit or excludable assistance begins to phase out for taxpayers with MAGI in excess of $194,580 and is completely phased out for taxpayers with MAGI of $234,580 or more.
Alternative minimum tax (AMT) exemption amounts. The AMT exemption has increased to $80,800 ($40,400 if married filing separately, $51,900 for all other taxpayers). In addition, nonrefundable credits are allowed against AMT, and the exemption amounts are now permanently indexed for inflation. For 2012, the AMT exemption was $78,750 ($39,375 if married filing separately, $50,600 for all other taxpayers).
Capital gains and dividend rates for high-income individuals. For those with taxable income over $450,000 ($425,000 if head of household, $400,000 if single), the capital gains and dividend rate will be 20 percent.
Personal exemption increased for certain taxpayers. The personal exemption amount has increased to $3,900 for taxpayers with AGI at or below $300,000 ($275,000 if head of household, $250,000 if single, $150,000 if married filing separately). The personal exemption amount for taxpayers with AGI above this threshold may be reduced.
Social Security and Medicare tax for 2013. The rate of Social Security tax withholding (for employees only) has been restored to 6.2 percent for wage payments made in 2013, up to the Social Security wage limit of $113,700. The Medicare tax rate is 1.45 percent; there is no wage limit. The rate for net earnings from self-employment is 12.4 percent, up to the Social Security wage limit of $113,700. These changes are often referred to as the payroll tax increase.
Standard deduction. Taxpayers who do not itemize their deductions may be able to take the standard deduction. The basic standard deduction has increased for 2013.
Standard mileage rates. The 2013 rate for business use of a vehicle is 56.5 cents a mile, the rate for use of a vehicle to get medical care or move is 24 cents a mile, and the rate for charitable use of a vehicle remains at 14 cents a mile.
American Opportunity Tax Credit. Extended through 2017, the American Opportunity Tax Credit provides for a 100 percent tax credit on the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a maximum credit of $2,500 per eligible student. The credit applies to the first four years of a student’s postsecondary education.
Qualified tuition and related expenses. This “above the line” deduction (meaning you don’t need to itemize to claim it) has been extended until Dec. 31, 2013, and was retroactively extended for 2012.
Student loan interest deduction. The 60-month time limit has been permanently suspended for this $2,500 “above the line” deduction.
Coverdell education savings accounts (ESAs). The annual contribution limit of $2,000 for Coverdell ESAs has been made permanent. Distributions must be used for qualified education expenses for students attending elementary, secondary or postsecondary schools.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax adviser or lawyer.
Kevin Dick is a financial adviser at Kevin Dick Investment Management Group, 620 E. Highway 260, Suite B. He offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network®, Member FINRA/SIPC, a registered investment adviser. He can be reached at (928) 474-4350 or at kevin@kevindickimg .com.