7 changes to Form 1040
Before you start preparing your 2013 tax return, review these important updates.
Time marches on, and you'll soon be receiving your 2013 W-2 and 1099s. So it's not too soon to start thinking about putting together your Form 1040 for last year. As you do, please take note of the following key federal income tax changes that took effect in 2013.
New higher tax rates for upper-income individuals
For most individuals, the 2013 federal income tax rates are the same as for 2012: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. However, the American Taxpayer Relief Act (ATRA) increased the maximum rate for 2013 to 39.6 percent. That rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000.
For most individuals, the 2013 federal income tax rates on long-term capital gains and dividends are also the same as for 2012: either 0 percent or 15 percent. However, the ATRA raised the maximum rate for 2013 to 20 percent for singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000. Folks with 2013 taxable income below these levels will pay a 15 percent federal rate on long-term gains and dividends or 0 percent for gains and dividends that would otherwise fall within the 10 percent or 15 percent brackets.
New 3.8 percent Medicare surtax on investment income collected by upper-income individuals
Starting in 2013, all or part of your net investment income, including long-term capital gains and dividends, can potentially get socked with an additional 3.8 percent "Medicare contribution tax." As a result, the maximum federal rate on long-term gains for 2013 is actually be 23.8 percent (versus the 15 percent maximum rate that applied on your 2012 return). The new 3.8 percent Medicare tax only applies if your adjusted gross income (AGI) exceeds: (1) $200,000 if you're unmarried, (2) $250,000 if you're a married joint-filer, or (3) $125,000 if you use married filing separate status.
Specifically, the 3.8 percent Medicare tax hits the lesser of your net investment income or the amount of AGI in excess of the applicable threshold. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities, gains from assets held for investment like stocks and bonds, the taxable portion of personal residence gains, and income and income and gains from the business of trading in financial instruments or commodities,. (Income and gains from assets held for business purposes are not subject to the 3.8 percent tax.)
For example, a married joint-filing couple with 2013 AGI of $295,000 and $60,000 of net investment income would owe the 3.8 percent tax on $45,000 (the amount of AGI over the $250,000 threshold for joint-filers). If the same couple had AGI of $350,000, they would owe the 3.8 percent tax on $60,000 (the entire amount of their net investment income). To figure out if you owe the new 3.8 percent Medicare surtax, fill out IRS Form 8960 (Net Investment Income Tax).
New 0.9 percent Medicare surtax on salaries and self-employment income earned by upper-income individuals
Before 2013, the Medicare tax on salary and/or self-employment (SE) income was a flat 2.9 percent. If you're an employee, 1.45 percent was withheld from your paychecks, and the other 1.45 percent was paid directly by your employer. If you're self-employed, you paid the whole 2.9 percent yourself.
Starting in 2013, an extra 0.9 percent Medicare tax is charged on: (1) salary and/or SE income above $200,000 for an unmarried individual, (2) combined salary and/or SE income above $250,000 for a married joint-filing couple, and (3) salary and/or SE income above $125,000 for those who use married filing separate status. For self-employed individuals, the additional 0.9 percent Medicare tax hit comes in the form of a higher SE bill.
To discover whether you owe the new 0.9 percent Medicare surtax, fill out IRS Form 8959 (Additional Medicare Tax).
New personal and dependent exemption deduction phase-out rule for upper-income individuals
The last time we saw a phase-out rule for personal and dependent exemption deductions was back in 2009. Sadly, the phase-out deal is back for 2013 and beyond. As a result, your 2013 personal and dependent exemption write-offs might be reduced or even completely eliminated. Phase-out starts at the following adjusted gross income (AGI) thresholds: $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
New itemized deduction phase-out rule for upper-income individuals
The last time we saw a phase-out rule for itemized deductions was also back in 2009. Unfortunately, this phase-out provision has also been resurrected for 2013 and beyond. As a result, you can potentially lose up to 80 percent of your 2013 write-offs for home mortgage interest, state and local income and property taxes, charitable contributions and miscellaneous itemized deduction items (such as investment expenses and fees for tax advice and preparation).
Phase-out starts as the following AGI thresholds: $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns. More specifically, the total amount of your affected itemized deductions is reduced by 3 percent of the amount by which your AGI exceeds the threshold. However, the reduction cannot exceed 80 percent of the total affected deductions that you started off with.
New higher threshold for itemized medical expense deductions
Before 2013, you could claim an itemized deduction for medical expenses paid for you, your spouse, and your dependents, to the extent the expenses exceeded 7.5 percent of AGI. Starting in 2013, the hurdle is raised to 10 percent of AGI for most folks. However, if either you or your spouse were age 65 or older as of Dec. 31, 2013, the new 10 percent-of-AGI threshold will not affect you until 2017.
Members of legally married same-sex couples must file as married individuals
Thanks to the well-publicized 2013 Supreme Court decision, same-sex marriages that are recognized under state or foreign laws must now be recognized for federal tax purposes. So folks who were married under such laws as of the end of 2013 must use either married joint-filer status or married filing separate status for their 2013 federal income tax returns. In most cases, filing jointly will be the tax-smart choice. In any case, members of legally married same-sex couples cannot file their federal returns as unmarried individuals for 2013 and beyond.
Note that members of same-sex couples who have entered into civil unions or domestic partnerships are still treated as unmarried individuals for federal tax purposes.
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what a shock, we have a crazy liberal president and the taxes go up and deductions go down. then he cant figure out why the economy sucks.. who could have saw this coming? oh yeh the people who work for a living to get ahead and start businesses .. bend over america we are all being screwed and more than normal
The old 1040EZ form should work just as well as the new one - you know, the one that says, "How much money did you make? Send it!!!"
Barry told you he was going to fundementally chsnge this nation, and you boobs still voted him in. TWICE. Suck it America
oh I hope it's the pear-shaped clinton. what barry doesn't **** up that bit. -ch will
Welcome to the future -- Trickle down Taxes once the rich get hit in the future this will roll down hill to the lower incomes levels.
The upper 1% can't support the lower 99% its a lose, lose situation.
why should we expect simple straight forward return forms, instructions, rates, minimal exceptions and exceptions from exceptions when the mentality of lawmakers and special interest groups do not allow them to think clearly.
either income is income or it ain't !
a deduction is a deduction or it ain't!
punitive tax rates and losses of deductions should not be based on how unsuccessful a hard working wage earner was in reducing his/her income below a certain level.
why tack on penalties for being successful to those who succeeded?
no doubt we need a fair tax system but a successful system can't come from government thinkers. if it's too simple, businesses would pay tax on every dollar of sales, resulting in definite losses. if it's not simple enough, we'll have what we have now.
you can bet that the folks calling the shots with our present tax codes had figured out how to avoid being caught in their own tax trap before they allowed congress to enact the changes. most americans are saying "forget the fv<kin' cheese, I just want out of the trap!"
Can't wait to hear the gays complaining about that one. You asked for it now pay the price.
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