The 2013 tax filing season opened on January 31st, a little later than usual, due to the government shutdown. For a few years, things were status quo with the tax code, but Congress’ Fiscal Cliff deal of January 1, 2013 introduced some big changes, extended some valuable credits and made it more difficult to claim other credits and deductions.
Social Security (FICA) tax: 160 million wage earning American have already seen an increase in their taxes: employees’ contributions to the Social Security program returned to the pre-recession level of 6.2 percent, from 4.2 percent, on earnings up to $113,700 in 2013. The same increase applies to net earnings from self-employment—the rate will be 12.4 percent (up from 10.4%) up to $113,700 and the deduction for self-employment tax has been restored to 50 percent.
Additional Medicare tax: A 0.9 percent additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status.
New brackets: Individuals who earn more than $400,000 and couples who make more than $450,000 are now in the 39.6 percent tax bracket, their capital gains and dividends increased to 20 percent from 15 percent and the Affordable Care Act levied an additional “net investment income tax” of 3.8 percent on capital gains.
Reinstated Phaseouts: The Personal Exemption Phaseout (PEP) and the itemized deduction limits were reinstated for single taxpayers who earn $250,000 and $300,000 for joint filers. These rules are meant to reduce or eliminate the value of personal exemptions for taxpayers earning more than the income threshold. The effect of the reinstatement of the limits amounts increases taxes by just over 1 percent to the top tax rate as well as on capital gains rates.
Alternative Minimum Tax (AMT): AMT was created in 1969 to ensure that wealthy taxpayers pay at least some minimum amount of federal income tax, regardless of deductions, credits or exemptions. In essence, it is a flat tax with two brackets, 26 percent and 28 percent. Congress created a permanent inflation "patch" that would allow millions to escape AMT. Without it, the AMT would have hit 31 million taxpayers this year, reaching deeply into the middle class. The AMT exemption amount increased to $51,900 ($80,800 MFJ).
The Child Tax Credit: Up to $1,000 for each qualifying child who was under the age of 17 at the end of 2013. This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples earning over $110,000 ($75,000 for singles). (IRS Publication 972.)
The Child and Dependent Care Credit: Available if you pay someone to care for your dependent that is under age 13, so that you can work or look for a job. The credit is 20 to 35 percent of your child-care expenses up to $6,000 -- the size of your credit depends on your income. (IRS Publication 503.)
The Earned Income Tax Credit (EITC): A refundable credit for married couples with 2013 earned income under $51,567 and singles who made less than $46,227. The more children you have, the more money you receive. Your income and family size determine the amount of the credit, but the maximum credit is $$6,044 this year. (IRS Publication 596.)
American Opportunity Tax Credit: A refundable tax credit for undergraduate college education expenses that was extended through December 2017. The credit modifies the Hope Credit for higher education expenses, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. The full maximum annual credit of $2,500 per student is available to individuals, whose modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 or less for married couples filing a joint return.
Lifetime learning credit income limits: In order to claim a lifetime learning credit, your MAGI must be less than $63,000 ($127,000 MFJ).
Medical and dental expenses: You can deduct only the part of your medical and dental expenses that exceed 10 percent of your AGI. The previous level of 7.5 percent is in effect if either you or your spouse is age 65 or older.
Standard mileage rates: The rate for business use of your vehicle is increased to 56½ cents per mile. The rate for use of your vehicle to get medical care or move is increased to 24 cents per mile. The rate of 14 cents per mile for charitable use is unchanged.
Retirement savings contribution credit income limit: In order to claim this credit, your MAGI must be less than $29,500 ($59,000 MFJ)
Adoption credit or exclusion: The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $12,970. In order to claim either the credit or exclusion, your MAGI must be less than $234,580.
IRS.gov Software, Tools, Info: The IRS provides free tax prep software (“Free File”) to taxpayers whose incomes are $58,000 or less; electronic e-filing is available to all taxpayers, regardless of income; and the “Where’s My Refund” tool allows people to track refunds within 24 hours after the IRS has received an e-filed return or within four weeks after you have mailed a paper return.
Patience: Tax time is, well, taxing. Pace yourself and if you can’t get your answer online and want to call the IRS, be prepared to wait. The agency has come under pressure, due to government cuts. In fiscal year 2013, the IRS answered only 61 percent of calls from taxpayers, and the average wait time to get an answer was nearly 18 minutes, according to the annual report of the National Taxpayer Advocate. If you need professional help, find it sooner rather than later. Tax pros rarely take on new clients after March.
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