Income Tax Law Changes for 2013

by Kevin Mercadante

The ink on your 2012 income tax returns is probably barely dry, but it’s already time to start looking ahead to income tax law changes for 2013. You may not have to concern yourself with filing for close to another year, but now is the time to begin setting up for a more comfortable ride so when filing season comes back around, it will be less stressful.

Here are some of the major changes you can expect to see. While most of these changes won’t help you reduce your income tax exposure, there is a little bit of good news. We’ll look at that good news and some of the not so good news as well.

Income tax brackets

All income tax rates will be adjusted for inflation, which means only minor changes (to your benefit) in 2013. The big news (and it isn’t good for high income earners) is that the maximum income tax rates will increase from 35% to 39.6% for individuals earning over $400,000, and on married filing jointly of over $450,000.

Capital gains tax rate

The long-term capital gains tax rate will be 15% for 2013, however it will rise to 20% for individuals earning over $400,000, and on married filing jointly of over $450,000. Looks like some of us are going to be looking for ways to reduce capital gains.

Patient Protection and Affordable Care Act (PPACA) surcharge

The healthcare reform bill won’t be fully implemented until 2014, but there are a couple of tax changes related to it that will apply for 2013.

The first is a .9% tax on earned income for individuals earning over $200,000, or $250,000 for married couples filing jointly. The second is a 3.8% Medicare tax on unearned income, which applies at the same income thresholds. The wealthy are really getting smacked around this year.

Itemized deduction- and personal exemption-phase outsincome tax law changes

The deductions for itemizing and for personal exemptions will largely phase out for high income taxpayers for 2013. 80% of itemized deductions will phase out with an income of $250,000 for singles, and $300,000 for married filing joint. Personal exemptions will phase out at the same income levels.

Deductions that have been substantially preserved

2013 may see the reduction of overall deductions by high income taxpayers, but there are several individual deductions that will continue to be in effect for this year and beyond.

  • The $1,000 per child tax credit for a child up to age 17 will be retained for 2013 and beyond.
  • Qualified mortgage insurance premiums can continue to be deducted.
  • Educator expenses up to $250.
  • The deduction for state and local sales taxes.

In addition, you may still be able to qualify for the discharge of qualified principal residence exclusion from forgiveness of debt as a result of a foreclosure or short sale. This is a hold-over Bush-era provision from 2007.

The payroll tax

As most people are already aware, the Social Security portion of the payroll tax has been restored to 6.2% from 4.2% during the Bush-era tax cuts. In addition, the income subject to the tax will rise to $113,700.

Changes to gift and estate taxes

This is a good news/bad news scenario, but mostly good for most taxpayers. The bad news is that the maximum tax rate for gifts and estates has risen from 35% to 40%. But the good news is that the first $5 million is exempt, and that will exclude the vast majority of American households. In other words, most of us can die in peace!

The Alternative Minimum Tax (AMT)

The AMT was expected to hit many millions of additional taxpayers this year, but thanks to action by Congress during the Fiscal Cliff negotiations, the tax is now indexed to inflation (like the rest of the tax code). That will mean smooth sailing ahead for tens of millions of taxpayers who may have been forced to pay it otherwise.

As you can see, the story for 2013 will mostly be one of higher taxes. But as you can also see, the most significant increases will affect high income earners. And with all the changes, it will be a good year to engage the services of a CPA, tax attorney or enrolled agent. This is a lot of change for one tax year!

Are you going to do anything differently as a result of these new tax laws? What is it?


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