WASHINGTON – Higher-income Americans and some legally married same-sex couples are likely to feel the biggest hits from tax law changes when they file their federal returns in the next few months. Taxpayers also will have a harder time taking medical deductions.
In other changes for the 2013 tax year, the Alternative Minimum Tax has been patched – permanently – to prevent more middle-income people from being drawn in, and there’s a simpler way to compute the home office deduction.
Tax rate tables and the standard deduction have been adjusted for inflation, as has the maximum contribution to retirement accounts, including 401(k) plans and Individual Retirement Accounts.
People will be able to start filing returns Jan. 31, a week and a half later than the original Jan. 21. No change in the April 15 deadline, however.
The tax legislation passed at the start of 2013 permanently extended the Bush-era tax cuts for most people, 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. And there are new taxes for them to help pay for health care reform.
There are different income thresholds for each of these new taxes.
An additional 0.9 percent Medicare tax, for example, kicks in on earnings of more than $250,000 for married couples filing jointly and $200,000 for singles and heads of household. Same for a 3.8 percent tax on investment income.
But the phase-out of personal exemptions and deductions doesn’t begin until $300,000 for married couples filing jointly and $250,000 for singles.
Many credits and deductions were extended for 2013, including several for education. Among them: the American Opportunity Credit of up to $2,500 per student for tuition and fees and deductions for student loan interest and tuition-related expenses. Many of these are phased out at higher income levels.
Schoolteachers will still be able to deduct up to $250 in out-of-pocket expenses for books or other supplies.
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, however, for those older than 65. For them, the old rate is grandfathered in until 2017.
HOME OFFICE DEDUCTION
Among the other changes for 2013, taxpayers who work at home will now have a simplified option for taking a home office 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 says.
But, if you sit at your kitchen table and check work email, it doesn’t qualify. “The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job,” according to the agency.
The IRS said that for tax year 2011, the most recent year for which numbers are available, more than 3.3 million people claimed nearly $10 billion in home office deductions using Schedule C. The number does not include the home office deduction taken by farmers, which is taken on a different form.
Most taxpayers claiming the deduction are self-employed, according to the IRS.
Until this year, you had to figure actual expenses for a home office, according to Weltman. “Starting with 2013 returns, if you’re eligible for the deduction, you can take a standard deduction of $5 per square foot, up to 300 square feet,” she said. The maximum deduction using this method is $1,500.
The IRS says people who take the simplified option will have to fill out one line on Schedule C, as opposed to a 43-line form.
Weltman likened the simplified home office deduction to the IRS deduction for business use of your car. “You can do your actual costs or the IRS mileage rates.”
The standard mileage rate for business use of a car in 2013 is 56.5 cents a mile.
Beginning this year, same-sex couples who are legally married will for the most part have to choose married filing jointly or married filing separately when doing their tax returns. This is true even if they live in a state that does not recognize gay marriage.
Many of these couples will now find themselves hit by the marriage penalty, especially if both spouses work.
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 exemption.
However, when it comes to things like estate taxes, the federal recognition of same-sex marriage will help legally married gay and lesbian couples. That was the issue in the Supreme Court decision in the case of Edith Windsor, who had to pay estate taxes after her lesbian spouse died.
In addition, health insurance purchased from an employer for a same-sex spouse can be paid pre-tax and excluded from income.
“Like opposite-sex couples, gay and lesbian married couples can qualify to use the head-of-household status, when kids are involved, where the spouses are living apart,” the IRS says.
Same-sex married couples also have the option of filing amended returns going back to 2010, using the married-filing-jointly status. Rosica said couples will have to look at their individual circumstances to see if that’s beneficial from a tax perspective.
When it comes to filing state returns, same-sex married couples living in states that don’t recognize gay marriage most likely will have to file as singles. Since federal returns often are used as a starting point for state returns, that could force them to calculate their federal taxes twice, once for filing the federal return and once for figuring out their state taxes.
If you made energy efficiency improvements to your home, such as installing new windows or a qualifying furnace or heat pump, you might be able to take an energy credit of 10 percent of the cost up to a lifetime maximum of $500.
However, of that total, the IRS says, “only $200 can be for windows, $50 for any advanced main air circulating fan, $150 for any qualified natural gas, propane, or oil furnace or hot water boiler, and $300 for any item of energy-efficient building property.”
There are additional credits for solar. However, the credit for plug-in electric vehicles has expired.
Once again, the IRS is reminding taxpayers to make sure their Social Security numbers are entered correctly and their returns are signed. Those who feel they need more time can apply for an extension, until Oct. 15. But if you do file for an extension, remember to estimate and pay any taxes due — or face a possible penalty.
Internal Revenue Service: www.irs.gov