What’s New on Your 2013 Form 1040
Jan 21, 2014
Last year’s W-2s and 1099s should be arriving in your mailbox or inbox soon. So it’s officially time to start thinking about filing your 2013 personal tax return. Here’s what you need to know about the key tax law changes that took effect in 2013:
Higher Rates for Upper-Income Individuals
Most individuals will pay the same federal income tax rates for 2013 that they did for 2012. The exception are those individuals in the upper-income brackets. For them, the American Taxpayer Relief Act (ATRA) raised the maximum federal rate for 2013 to 39.6% (up from 35 %). The 39.6% rate 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.
Higher Capital Gains Rates and New Tax
Most individuals will also pay the same federal income tax rates on long-term capital gains and dividends as in 2012. But again for upper-income individuals, the ATRA raised the maximum rate for 2013 to 20%(up from 15 %). The 20% rate 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.
But that’s not all. Starting in 2013, upper-income individuals can also expect to get socked with the new 3.8% Medicare contribution tax on all or part of net investment income, including long-term capital gains and dividends. In other words, the maximum federal rate on long-term gains and dividends for 2013 is actually 23.8% (20%t capital gains tax plus 3.8 percent Net Investment Income Tax). In 2012, long-term gains and dividends were subject to a maximum tax rate of just 15%.
The new 3.8% Net Investment Income Tax (or NIIT) can also potentially hit other types of income too, such as:
- Short-term capital gains;
- Rental income;
- Income and gains from passive investments in partnerships, limited liability companies and S corporations; and
- The taxable portion of gains from selling personal residences.
You will be hit with the NIIT if your adjusted gross income (AGI) exceeds $200,000 if you are unmarried or $250,000 if you are a married joint-filer. It’s charged on the lesser of your net investment income or the amount by which your AGI exceeds the applicable threshold.
Additional Medicare Tax on Wages and Self-Employment Income
Before 2013, the Medicare tax on salaries and self-employment income was a flat 2.9%. For an employee, 1.45% was withheld from paychecks and the other 1.45 percent was paid directly by the employer. Self-employed sole proprietors, partners and LLC members paid the whole 2.9%themselves. That was then.
Starting in 2013, a 0.9% Additional Medicare Tax is charged on salary and self-employment income above $200,000 for an unmarried individual or combined salary and self-employment income above $250,000 for a married joint-filing couple. If you are self-employed, the 0.9% Additional Medicare Tax is owed as part of your self-employment tax bill.
Personal and Dependent Exemption Phase-out
Personal and dependent exemptions weren’t phased out from 2010 through 2012. Regardless of how much you earned, you could deduct the full amount of your allowable exemptions when calculating your federal taxable income.
But now an exemption phase-out rule is back on the books for 2013 and beyond. This may significantly lower or completely eliminate your personal and dependent exemption write-offs. In 2013, exemptions begin to be phased out at the following adjusted gross income (AGI) thresholds: $250,000 for singles, $300,000 for married joint-filing couples and $275,000 for heads of households.
Itemized Deduction Phase-out
Itemized deductions also weren’t phased out from 2010 through 2012. Unfortunately, the itemized deduction phase-out rule was resurrected for 2013 and beyond. This phase-out can significantly reduce your write-offs for home mortgage interest, state and local income and property taxes, charitable donations, and miscellaneous itemized deduction items, such as investment expenses and fees for tax advice and preparation.
The itemized deduction phase-out starts at the following AGI thresholds: $250,000 for singles, $300,000 for married joint-filing couples, and $275,000 for heads of households. Your affected itemized deductions are reduced by 3% of the amount by which your AGI exceeds the applicable threshold. However, the reduction cannot exceed 80% of the total affected deductions that you started off with.
Higher Threshold for Medical 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% of AGI. Starting in 2013, the hurdle is raised to 10 percent of AGI. However, if either you or your spouse was age 65 or older as of Dec. 31, 2013, the new higher AGI threshold will not affect you until 2017.