“Nothing is certain except death and taxes,” ~Ben Franklin, founding father of our country.
With the American Taxpayer Relief Act of 2012, the Affordable Care Act (ACA) Changes for 2013, and the Defense of Marriage Act (DOMA), several impactful changes have happened to the tax law in 2013. Liberty Tax Service provides a brief review of these tax changes.
Of all the tax changes for 2013, the majority fall under the American Taxpayer Relief Act of 2012 and some, such as the American Opportunity credit and the Earned Income Tax Credit, were extended until 2017.
One of the most impactful tax law changes for some was made to the Flexible Spending Account (FSA) and the Same-sex Marriage law. The IRS now allows for up to $500 to be rolled over from a FSA (recently capped at $2,500) or an employer can opt to offer a grace period. Additionally, the IRS will treat same-sex couples,legally married in jurisdictions that recognize their marriages, as married for federal tax purposes. The ruling stands even for those couples who do not reside in the jurisdiction where they were married.
Another big change to come about this year has been the implementation of the ACA, also known as Obamacare.
Under the ACA, a new Medicare payroll tax was implemented. Medicare tax on wages, compensation and self-employment income received in excess of $250,000 married filing jointly ($125,000 married filing separately; $200,000 single) will be 0.9%. Employers collect the extra 0.9% on wages exceeding $200,000 – with no regard to the employee’s filing status. It’s important for taxpayers to speak with a tax professional regarding this tax stipulation because not everyone charged the 0.9% will qualify since it applies to filing status.
A newMedicare tax of 3.8% may apply to investment income if the taxpayer’s AGI exceeds $250,000 married filing jointly; $125,000 married filing separately; $200,000 single.
There is also a higher threshold for deducting medical expenses from 7.5% of AGI to 10%; except for those 65 and over, it will remain unchanged at 7.5% until 2017.
There are more tax changes affecting individuals, including:
Income tax rate increases for high earners: A 39.6% rate applies to income above $450,000 married filing jointly; $400,000 single; $225,000 married filing separately.
Capital gain and dividend rate increase for high earners: Rate is up from 15% to 20% and applies to income above: $450,000 married filing jointly; $400,000 single; $225,000 married filing separately.
Personal exemption phase-out and itemized deduction limitation for high earners: Thresholds: $300,000 married filing jointly; $250,000 single; $150,000 married filing separately.
Permanent alternative minimum tax (AMT): Exemption amounts increased: $80,800 married filing jointly; $51,900 single; $40,400 married filing separately
Estate, gift and generation skipping transfer tax: Top rate increases from 35% to 40% (the $5,000,000 exemption was permanently extended).
Recovery Act of 2009 provisions extended for five years: Refundable child tax credit was extended, the American Opportunity Tax Credit was extended; changes were made to the earned income tax credit (EITC).
Pension provision: Retirement plans allow participants to transfer amounts to designated Roth accounts.
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