2013 has a lot of changes to the tax structure that you need to know whether you are preparing your own taxes or have a professional doing them. You have to remain informed about the top tax changes in order to be able to make good decisions going forward. Many of the changes will surprise you, as well as the income level they target. Some of the tax changes are beneficial for many, and others are going to be quite a burden for some.
The New Income Tax Rate
The most basic change to be aware of is the change of the basic income tax rate to 39.6% for incomes over $450,000. That is the general idea of the rate, but it is broken down into more specific target amounts for application. For instance, if you file as a head of household than the income amount is set at $425,000 to trigger the rate, or if you are filing separately from your spouse than the amount is set at $225,000 and it is $400,000 for those filing under the single status. There are many nuances to understanding when and how this cap rate is triggered, a good resource for professional tax advisors will help to clarify if the income tax rate applies.
Itemized deductions, Medicare and Dental expenses
There are new changes to the limits and allowances in itemized deductions, additional Medicare taxation and when dental expenses are allowed to be deducted. Many of the limitations are applied per income tax rate grouping. For example, the amount of itemized deductions allowed is now limited to income groups above $300,000 with applicable breakdowns for single, head of household and married by filing separately categories. There is now an additional 0.9% tax on Medicare wages and the percentage for allowable dental deductions has been raised from 7.5 to 10%.
Investments, Capital Gains and Dividend Rates
The tax definition for a high income individual is set at an annual income of $450,000 ($400,000 single, $425,000 head of household). The change in the capital gains and dividend rates for high income individuals now places it at 20%. This is a very complicated area of tax law and to truly understand how this will affect your taxes it is best to seek a consultation with a professional.
Exemptions
There is good news and bad for the state of allowed personal exemptions. If you earn below $300,000 and are not itemizing your deductions you can expect an increase in the allowable exemptions. If you are in a higher annual gross income bracket than that, there will most likely be a decrease in the allowed exemptions. The American Opportunity Tax Credit has been extended through 2017, which allows for a deduction in tuition and other costs which may help to balance out any decrease in exemptions or add to an increase for a better return.
Other Educational Good News
Along with the American Opportunity Tax Credit being extended, there are some other tax changes in 2013 that benefit those with educational debt or who are saving toward educational purposes. Above the line deductions have been extended forward and retroactively. The 60-month limit on the student loan $2,500 deduction is suspended. Also, the Coverdell ESAs maximum contribution has been made permanent.
These are just the highlights of the tax changes in 2013. To make sure that you get the best return on your tax dollars and keep as much of your income as possible, it is worthwhile to invest finding out more about the other changes that may affect you. Depending on your income bracket, there are different ways of combining exemptions and deductions to help you avoid the pain of taxes this season.
I usually do taxes myself and I try to keep up to date with all the new things each year whether they pertain to me or not. Things are always changing and taxes are getting harder to do every year – thanks so much for the information
I have always done my own taxes and it gets more complicated every year. The worst year was when I moved from another state and had to prep 2 state taxes, yuck! I dread tax time every year so will try to study up on it now to be more prepared.
I have always gone to a professional tax accountant and now that there are more tax changes that shall not change. Nevertheless I am glad to get an idea of how and where the changes will occur. Thanks for this info.