Don't overlook these!
The Mortgage Forgiveness Debt Relief Act (Act), which was passed in 2007, was extended through December 31, 2013. This relief was originally set to expire in 2009. In 2008 it was extended through 2012. This time around, in an attempt to avoid the "fiscal cliff", it was extended once again.
The Act waives forgiveness of mortgage debt from being counted as taxable income, with certain limits and so long as the taxpayer qualifies under the Act. Normally, forgiveness of mortgage debt is included in the taxpayer's income via Form 1099, which is issued to the taxpayer by the lender.
The maximum amount that can be treated as qualified principal mortgage debt under the act is $2 million ($1 million if married filing separately). Second mortgages are eligible if they were used for home improvements.
This relief applies mainly to short sales of homes or lender-approved sales for less than the principal mortgage balance. This means, if you owe $120,000 on your mortgage and you short sell your home for $100,000, you won't have to include the $20,000 deficiency in your taxable income.
This relief will also help to keep you from moving into a higher tax bracket, which could trigger additional taxes, such as the 3.8% Medicare surtax on unearned net investment income (discussed later on this page).
The deduction for mortage insurance premiums applies to mortgages issued or refinanced in 2007 through 2013. The deduction has been extended through 2013 and made retroactive to cover 2012. It covers private mortgage insurance and mortgage insurance provided by the Federal Housing Administration, the Veterans Affairs and the Rural Housing Service.
If you paid mortgage insurance premiums in 2012 and your adjusted gross income (AGI) is less the $100,000 ($50,000 if married filing separately), you may deduct 100% of the premiums you paid on your 2012 return. If your AGI was more than $100,000, your deduction is phased out (you lose 10% of the deduction for each $1,000 over $100,000).
Enter the deduction on Schedule A, line 13.
You may claim a 10% credit for energy improvements to existing homes in 2012 and 2013. This credit originally expired in 2011. However, the "fiscal cliff" bill has extended the credit through 2013 and made it retroactive to cover 2012.
Common energy-efficient improvements include such things as, a furnace, central air conditioning, traditional water heaters, windows, exterior doors, insulation, and a roof.
There is also a one-time federal tax credit of 30% of the cost (including installation costs) of qualifying geothermal heat pumps, solar water heaters, solar panels, small wind turbines, or fuel cells placed in service for an existing or newly constructed home through December 31, 2016. This tax credit is tied to the Energy Star specification that is in effect at the date of installation. Ask your Contractor about this credit before completing any improvement to make sure you are eligible for the tax credits.
The $500,000 first-year expensing deduction limit has been extended through 2012 and 2013. The first-year expensing deduction applies to new and pre-owned eligible property purchased and placed in service for business use.
The $2,000,000 purchasing limitation for eligible property for which the first-year expensing deduction is claimed has been extended through 2012 and 2013. The first-year expensing deduction is reduced dollar-for-dollar for each dollar spent over $2,000,000.
The bonus depreciation rate has been reduced from 100% in 2011 to 50% for 2012 and 2013. Bonus depreciation only applies to new eligible property placed in service for business use.
The 15-year straight-line recovery period has been extended through 2013 and made retroactive to cover 2012.
This notice includes the 2013 Percentage Method Tables for Income Tax Withholding. Employers should implement the 2013 withholding tables as soon as possible, but not later than February 15, 2013. Use the 2012 withholding tables until you implement the 2013 withholding tables.
Employers should implement the 6.2% employee social security tax rate as soon as possible, but not later than February 15, 2013. After implementing the new 6.2% rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of social security tax as soon as possible, but not later than March 31, 2013.
The new 2012 reporting requirement for employers to report the cost of health care for employees in Box 12 of Form W-2 is for the employee's information only. The reporting is intended to inform them of the cost of their health care coverage and does not cause excludable employer-provided health care coverage to become taxable.
However, if you filed fewer than 250 W-2s in 2011, then under the transition relief in IRS Notice 2012-9, you will not be required to report the cost of coverage for your employees on 2012 Form W-2.
Keep in mind, this reporting requirement does not apply to 2% S corporation shareholder/employees. These taxpayers must report payment or reimbursement of their health care premiums as wages in Box 1 of Form W-2.
The Patient Protection and Affordable Care Act ("PPACA") imposes a 2.3% excise tax on the sale of certain medical devices in the United States. The tax went into effect as of January 1, 2013. The tax is codified in Section 4191 of the Internal Revenue Code. It applies to U.S. sales of "taxable medical devices" by their manufacturer, importer, or producer after December 31, 2012.
According to the legislation, the roster of "taxable medical devices" does not include "eyeglasses, contact lenses, hearing aids, and any other medical device determined to be of a type that is generally purchased by the general pubic at retail for individual use."
Under Sec. 4191(b)(1), a taxable medical device is a device, as defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) (21 U.S.C. §321(h)), that is intended for humans.
A "device" is defined as an "instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article" - including "any component, part, or accessory" - that meets certain requirements. For example it must be recognized in the officail National Formulary, or the United States Pharmacopeia, or any supplement to them.
The IRS and Department of Treasury issued final regulations on December 5, 2012 providing guidance on the tax.
A 3.8% "surtax", which is part of Obama's health care law, goes into effect Jan. 1, 2013. The tax is intended to help fund health care. It applies to married couples filing jointly with adjusted gross income (AGI) of more than $250,000 and single filers with more than $200,000 AGI. The tax applies to "unearned" net investment income. (AGI appears at the bottom of Form 1040 on line 37.)
The surtax tax applies to: Dividends; rents; royalties; interest (except municipal-bond interest); short-term and long-term capital gains; the taxable portion of annuity payments; income from the sale of a principal home above the $250,000/$500,000 exclusion; a net gain from the sale of a second home; and passive income from real estate and investments in which a taxpayer doesn't materially participate, such as a partnership."
Example of how the surtax works if you sell a house:
In 2013 a married couple has wage income of $225,000. They also sell their San Francisco home in 2013 for $700,000. They paid $150,000 for the home 20 years ago. After subtracting their cost of $150,000 PLUS their $500,000 exclusion (allowed for married couples) from the $700,000, their taxable gain is $50,000 ($700,000 minus $650,000).
The $50,000 is their investment income. Their adjusted gross income is $275,000 (wages: $225,000 plus the $50,000 taxable gain).
The surtax tax applies to $25,000, the amount by which their investment income of $50,000 exceeds the $250,000 threshold for married couples filing jointly:
AGI $275,000 MINUS $250,000 threshold for married couple filing jointly Equals $25,000 (investment income subject to the surtax).
Tax computation: Their additional tax is $950 (3.8% x $25,000).
The top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes over $400,000 and married couples filing jointly with incomes over $450,000.
In addition, the new 3.8% Medicare surtax on net investment income increases the capital gains rate for taxpayers with income exceeding $450,000 ($400,000 for single filers) to an overall rate of 23.8% (20% plus 3.8%).
The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.
Incomes over $450,000:
For households earning over $450,000 per year, the dividend tax rate for 2013 is 20% (up from 15% in 2012). In addition to the 20% rate, these taxpayers will pay an additional 3.8% surcharege for Obamacare, bringing the total tax on dividends 23.8%.
Incomes over $250,000 (or $200,000 for single filers):
For those fililng jointly with incomes over $250,000 ($200,000 for single filers) the dividend tax rate is 15% plus the 3.8% Obamacare surcharge, bringing the total tax rate on dividends to 18.8% for this group of taxpayers.
The 3.8% Obamacare surcharge is actually a new Medicare Tax on "unearned" net investment income imposed on higher income taxpayers starting in 2013.
On January 11, 2013, the Internal Revenue Service announced annual inflation adjustments for tax year 2013, including the tax rate schedules, and other tax changes from the recently passed American Taxpayer Relief Act of 2012.
Beginning 2013 a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). This new rate will apply to tax returns filed in the 2014 tax season. The other marginal rates — 10, 15, 25, 28, 33 and 35 percent — remain the same as in prior years.
The Social security tax rate for employees increases to 6.2% for 2013 (up from 4.2%). The employer's share of the tax remains 6.2%.
The 2013 social security wage base limit increases to $113,700 (up $3,600 from the 2012 taxable wage base of $110,100).
Beginning in 2013, high income earners will be hit with an extra .9% (.009) Medicare tax. The additional .9% kicks in when income thresholds reach the following:
These thresholds will not be adjusted for inflation.
Self-employed people pay the additional .9% via their self-employment tax. Unfortunately, the additional .9 percent won't qualify for a deduction on Form 1040 (the above-the-line deduction for self-employment tax). The additional .9 percent Medicare tax must be taken into account for estimated tax purposes.
The regular Medicare tax rate for lower income taxpayers remains 2.9% (1.45% for the employer's share and 1.45% for the employee's share. Self-employed persons pay the entire 2.9% via the self-employment tax computed on Schedule SE)
The estate tax exemption, lifetime gift tax exemption and generation skipping transfer tax exemption will each be $5.25 million for 2013 and indexed for inflation in later years, and the tax rate will be 40%.
Keep in mind, the lifetime gift tax exclusion and the estate tax exclusion are expressed as a total amount, which is $5,250,000 per person (sometimes called the “unified credit”). If you exceed the limit, you (or your heirs) will owe tax of up to 40%.