As taxpayers sit down to work on their income tax returns, they will face the impact of several law changes in 2013.
Among them are the American Taxpayer Relief Act, new provisions of the Affordable Care Act and the U.S. Supreme Court’s decision to strike down a portion of the Defense of Marriage Act.
“New laws, as well as tax provisions that expired at the end of 2013, may make a noticeable impact for some taxpayers, depending on their income levels and other factors,” said Mark Luscombe, principal federal tax analyst at Wolters Kluwer CCH, which publishes information for tax professionals.
Higher-income taxpayers will feel the biggest hit from the tax law changes.
The tax legislation passed at the start of 2013 permanently extended the Bush-era tax cuts, but also added a top marginal tax rate of 39.6 percent for those at higher incomes $400,000 for single filers, $450,000 for married couples filing jointly and $425,000 for heads of household.
On top of that, higher-income taxpayers could see their itemized deductions and personal exemptions phased out and pay higher capital gains taxes 20 percent for some taxpayers.
Here are the major changes in tax law:
• New Medicare taxes: The Affordable Care Act imposed two new Medicare taxes that start with the 2013 tax year: a 3.8 percent tax on net investment income and a 0.9 percent additional Medicare tax.
Net investment income includes income from interest, dividends, rents, royalties and gains from the sale of most properties. The exception is if that income came from an “active” trade or business, said Ken Sibley, certified public accountant and principal at CliftonLarsonAllen LLP in Dallas.
“Income from passive activities is generally included in net investment income” and is subject to the tax, Sibley said. Income from an active business is not.
The difference between active and passive activities has to do with how much risk you assume and the level of personal involvement you have, he said. “Where you have the most to lose, you’re going to be more active,” Sibley said.
For example, if you own a building and you rent it to a grocery store, the rental income would be considered passive. But if you own and operate the store, it’s considered an active activity, he said.
This tax is complicated, so be sure to consult with a tax professional.
The surtax will apply to taxpayers whose modified adjusted gross income exceeds:
• $250,000 for married taxpayers filing jointly and surviving spouses;
• $125,000 for married taxpayers filing separately;
• $200,000 for unmarried taxpayers and heads of household.
“The amount actually subject to the tax is the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you,” said Sibley.
Any income exempt from income tax is similarly exempt from this tax, Sibley said.
Money from retirement plans, such as individual retirement accounts, also aren’t subject to the tax.
Like the net investment income tax, the additional 0.9 percent Medicare tax kicks in on earnings over $250,000 for married couples filing jointly and $200,000 for singles and heads of household.
“Each tax is designed to fund different areas of health care reform, based on income thresholds,” Luscombe said.
• Same-sex couples: The Supreme Court’s decision on the Defense of Marriage Act has led to significant changes by the Internal Revenue Service, which for the first time will begin recognizing same-sex married couples for federal tax purposes. That applies even if the couple lives in a state that doesn’t recognize same-sex marriage.
That means that legally married same-sex couples must choose married filing jointly or married filing separately when doing their tax returns for 2013.
“Previously, same-sex married couples could file under the married status in certain states, but not for federal tax returns,” Luscombe said.
One consequence is that some couples may face higher taxes, especially if both spouses work.
“The many provisions of the Internal Revenue Code that create a potential marriage penalty for dual income couples could also create higher taxes for dual income same-sex couples,” Luscombe said.
For example, with their incomes combined, they might hit the threshold for the extra Medicare taxes, or the beginning of the phase-out of deductions and the standard exemptions.
• The AMT: The alternative minimum tax was designed to ensure that high-income earners with multiple deductions pay at least some tax. But over time, it has captured many moderate-income taxpayers because it wasn’t indexed to inflation.
Last year, the AMT was patched – permanently – to prevent more middle-income taxpayers from being drawn in.
“After years of temporary patches to help middle-income earners avoid the AMT, the AMT exclusion amount was increased in 2013 and permanently indexed for inflation,” Luscombe said.
The AMT is imposed on an adjusted amount of taxable income above a certain threshold or exemption level.
For the 2013 tax year, the exemption amounts are: $51,900 for individual taxpayers; $40,400 for married couples filing separately; and $80,800 for married filing jointly.
“A taxpayer’s alternative minimum taxable income has to exceed the exemption amount before you are subject to the AMT,” Luscombe said.
• Medical expenses: Taxpayers will still be able to deduct their medical expenses, but it will be more difficult for many to qualify.
The threshold for deducting medical expenses now stands at 10 percent of adjusted gross income, up from 7.5 percent. There’s an exception, though, for those older than 65. For them, the old rate is grandfathered in until 2017.
• Home office deduction: Beginning in 2013, taxpayers who work at home will have a simplified option for figuring their deduction.
“You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively,” the IRS said.
“This simplified option does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction.”
Until now, those who qualified for a deduction had to figure actual expenses for a home office. But now, you can take a standard deduction of $5 per square foot, up to 300 square feet. The maximum deduction using this method is $1,500.