That said, let’s review some important items to be aware of as you prepare to file your 2013 taxes, as well as look ahead to potential changes for 2014.
Filing your 2013 return
Americans are set to face a host of changes this tax season, both pleasant and not-so-pleasant. Highlights include:
- New top tax rate. Individual filers who earn more than $400,000 ($450,000 for married couples filing jointly) will fall into a new 39.6-percent bracket.
- Higher Medicare taxes. An additional Medicare surtax of 0.9 percent applies to income over $200,000 ($250,000 for married couples filing jointly). There’s also a new 3.8-percent tax on net investment income for taxpayers with modified adjusted gross income above that same threshold.
- Limitation on itemized deductions. Reintroduced in 2013, the limitation affects taxpayers with adjusted gross income (AGI) above $250,000 ($300,000 for married couples filing jointly), reducing itemized deductions by 3 percent of the AGI amount above the threshold. The same threshold also applies to phaseouts for personal and dependent deductions.
- Simplified home office deduction. Instead of calculating actual expenses for a home office, you can take a standard deduction of $5 per square foot of home office space, up to 300 square feet—for a maximum of $1,500.
- New filing options for married same-sex couples. Legally married same-sex couples must file their federal returns as married, regardless of whether their current state of residence recognizes same-sex marriage.
What’s in store for tax year 2014?
Dozens of tax breaks expired at the end of 2013, but it’s important to note that this won’t affect your 2013 return. And, by the time next tax season rolls around, Congress may have extended some or all of the expired provisions for 2014.
Here’s a look at a few key tax breaks that may not be available going forward:
- Mortgage debt forgiveness. During the housing crisis, struggling homeowners were able to exclude from their taxable income up to $2 million in forgiven mortgage debt on their principal residence.
- Charitable rollovers. If this provision isn’t renewed, people age 70½ and older will no longer be able to donate to charity directly from an individual retirement account, which allowed them to avoid recognizing the withdrawal as income and paying taxes on it.
- Bonus depreciation provision. Small business owners may lose out on the 50-percent bonus depreciation provision, which allowed them to deduct half the cost of qualified property in the first year of use and immediately reinvest that into the company.
While we can only wait and see whether Congress acts to extends these and other tax breaks, one change that’s already set for next tax season is Obamacare’s “individual responsibility payment.” If you don’t have health insurance in 2014, you’ll pay either 1 percent of your taxable income or a flat fee of $95 per uninsured adult and $47.50 per child, whichever is greater, with a maximum of $285 per family.
Time to change your W-4?
Tax season is also a good time to consider adjusting your W-4 withholding—especially if you’ve recently had a substantial change in income or if you plan to retire in 2014. The IRS’s withholding calculator can help you determine if you’re having too much or too little withheld from your pay.
More to come . . .
We hope you find this information helpful as you prepare your 2013 taxes and begin to plan for 2014. As always, we’ll update you on the latest tax news as it becomes available, with an eye to helping you minimize your liability and keep your financial plan on track.
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 advisor, or lawyer.
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