Tax Changes for 2013

Tax Brackets

For 2013, the 10%, 15%, 25%, 28%, 33% and 35% brackets for ordinary income reflect an inflation adjustment.

In addition, for 2013, there's a new top bracket of 39.6%. It applies to taxable income that exceeds $400,00 for single taxpayers, $425,000 for heads of households, $450,000 for married persons filing jointly and qualifying widow or widowers, and $225,000 for married taxpayers filing separately.

New 0.9% and 3.8% Medicare Tax Effective 2013

For 2013, higher-income taxpayers may have to pay one or both of the new additional Medicare taxes. The additional Medicare tax is suppose to help pay for Obamacare.

The 0.9% tax applies to wages, other employee compensation, and net self-employment earnings exceeding:

  • $250,000 if married filing jointly
  • $125,000 if married filing separately
  • $200,000 ( all other filing statuses)

The tax applies on Form 8959.

An employer will only withhold the additional Medicare tax once wages exceed $200,000.

Net Investment Income Tax (3.8%):

The 3.8% additional Medicare tax (called the Net Investment Income Tax or NIIT) applies to taxpayers with net investment income if modified adjusted gross income (MAGI) exceeds:

  • $250,000 if married filing jointly or qualifying widow or widower
  • $200,000 if single or head of household
  • $125,000 if married filing separately

MAGI is the same as adjusted gross income (AGI) unless the foreign earned income exclusion is claimed. The foreign earned income exclusion is added back to AGI, if it is claimed, to derive MAGI (minus any above-the-line deductions or exclusions that were disallowed or allocable to the excluded foreign earned income).

Currently, the law does not provide for an inflation adjustment to the above thresholds after 2013.

If MAGI exceeds the threshold, the 3.8% tax applies to the lesser of:

  • Your net investment income or
  • The MAGI exceeding the threshold

For example, if your net investment income is $25,000 and your MAGI $10,000, the 3.8% applies to the $10,000.

Estates and Trusts:

Estates and trusts may also be subject to the net investment income tax. The 3.8% tax generally applies to the lesser of its undistributed net investment income for the year or the excess of its AGI above the annual threshold for the 39.6% bracket for an estate or trust. For 2013, the 39.6% bracket threshold is $11,950.

Grantor trusts and certain charitable trusts are exempt from the 3.8% tax.

Investment income includes:

  • taxable interest
  • dividends
  • commercial annuities
  • rents
  • royalties
  • capital gains from sales of stocks, bonds,mutual fund, or investment real estate including a vacation home
  • capital gain distributions from mutual funds
  • passive income from partnership or S corporation interests if you were a passive owner

Do not count as investment income the following:

  • Social security benefits
  • nontaxable veterans benefits
  • income from businesses, including partnerships and S corporations in which you materially participate
  • tax-exempt interest
  • distributions from traditional IRAs, Roth IRAs, 401(k) plans and other qualified retirement plans such as pension plans, 403(b) plans and qualified annuity plans
  • life insurance benefits
  • alimony

If you sell your home at a gain, treat the gain as investment income for purposes of the 3.8% tax only to the extent that is exceeds the applicable home sale exclusion, which is $250,000 for single taxpayers and $500,000 for joint filers. If the gain is excluded from income, it is not subject to the 3.8% tax.

The tax applies on Form 8960.

Qualified Dividends and Net Capital Gain - New 20% Rate

In addition to the 0% and 15% rates that apply to qualified dividends and net capital gain (net long-term gain in excess of short-term losses), for 2013 there's a new 20% rate.

Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain.

For 2013, the maximum tax rate on qualified dividends is:

  • 0% on any amount that otherwise would be taxed at a 10% or 15% rate
  • 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%
  • 20% on any amount that otherwise would be taxed at a 39.6% rate.

The 20% rate applies to taxable income that exceeds $400,000 (single filer), $425,000 (head of household), $450,000 (married filing jointly), and $225,000 (married filing separately).

0% and 15% Rates:

If your top tax bracket is 10% or 15%, you qualify for the 0% rate.

First-year expensing (Section 179) and Bonus Depreciation (Section 168(k)) for Business Property and Vehicles

For 2013, the first-year expensing limit is $500,000. The 2013 phaseout threshold is $2,000,000.

Therefore, the $500,000 deduction limit is reduced dollar for dollar by the cost of purchases exceeding $2,000,000. For example, if you purchase $2,100,000 worth of qualifying property, the first-year expensing deduction would be reduced by $100,000 to $400,000.

For qualified leasehold, restaurant, and retail improvements, the first-year expensing limit is $250,000 in 2013.

2014 Change in First-year Expensing Limit and Purchase Threshold:

Unless Congress enacts legislation, the first-year expensing deduction is scheduled to fall to only $25,000 in 2014, a 95% reduction of the 2013 limit ($500,000). The purchase threshold is also schedule to be reduced. It will go down to only $200,000, a 90% reduction of the 2013 threshold ($2,000,000).

Eligible Property:

To be eligible for first-year expensing, the property must be purchased and placed in service in the same year. For example, if you purchased a computer in 2012 for personal use, then placed it in service for business use in 2013, first-year expensing is not allowed. Property purchased from related parties is not eligible for first-year expensing.

For first-year expensing purposes, the property does not have to be new when purchased. This is in contrast with the rules for claiming bonus depreciation (discussed below) where the property must be new. However, under bonus depreciation and first-year expensing rules, the property must be placed in service in the same year it was purchased.

If Business Use Drops to 50% or less:

If business use drop to 50% or less, you must recapture first-year expensing deductions from prior years through the year business use fell to 50% or less.

Bonus Depreciation:

For 2013, the bonus first-year depreciation rate is 50% of the adjusted basis of eligible property. The property must be new and placed in service in 2013. Used property does not qualify.

Bonus depreciation is set to expire at the end of 2013 unless action is taken by Congress to extend it.

Bonus depreciation may be claimed for property with a recovery period of 20 years or less, such as business equipment, machinery, furniture, cars, and trucks. The property must be used more than 50% for business.

Bonus depreciation may be claimed in addition to first-year expensing. However, first-year expensing must be taken into account first before computing bonus depreciation. If any basis remains after reducing the basis of the property by both first-year expensing and bonus depreciation, the remaining basis may be depreciated under the regular MACRS depreciation rules.

Passenger Cars:

For new cars weight-rated by the manufacturer at 6,000 or less (without passengers or cargo) placed in service in 2013, the depreciation ceiling is $3,160 (reduced for personal use).

However, a bonus depreciation allowance of $8,000 brings the maximum annual depreciation limit to $11,160 for passenger cars.

Light trucks, Vans, and SUVs:

For light trucks, vans, and SUVs weight-rated 6,000 pounds or less when fully loaded, the annual depreciation ceiling is $3,360. These vehicles are also allowed an additional deduction of $8,000 for bonus depreciation, bringing the maximum annual depreciation limit for these vehicles to $11,360.

Heavy Trucks, Vans, and SUVs

Trucks, vans, and SUVs weight-rated over 6,000 pounds are not subject to annual depreciation ceilings. However, first-year expensing for trucks, vans, and SUVs weighing over 6,000 pounds but not over 14,000 pounds is limited to $25,000 rather than the general expensing limit of $500,000 for 2013.

Standard Deduction

For married persons filing jointly and qualifying widows and widowers, the standard deduction for 2013 is $12,200. For heads of households it's $8,950. For single taxpayers and married persons filing separately, it's $6,100.

Additional Standard Deduction:

For a single taxpayer or head of household, there is an additional $1,500 standard deduction allowed for being 65 or older and an additional standard deduction of $1,500 if blind, regardless of age.

So, if you're 65 and blind, you add an extra $3,000 to your regular standard deduction. If you're under 65, but blind, you add an extra $1,500 to your regular standard deduction.

For married couples filing jointly, the additional standard is $1,200 for being 65 or older and $1,200 if blind, regardless of age.

If one spouse is 65 and the other is under 65, but blind, the total additional standard deduction is $2,400. If both spouses are 65 or older and one spouse is also blind, the total additional standard deduction is $3,600.

The additional standard deduction is simply added to the regular standard deduction.

If you turn 65 on January 1, 2014, for tax purposes, you are considered 65 as of December 31, 2013.

Personal Exemptions

For 2013, each allowable exemption is $3,900.

Not since 2009 has there been a phaseout of personal exemptions and itemized deductions. But for 2013, the phaseout is back.

Phaseout of Exemption for 2013:

Depending on your filing status and adjusted gross income (AGI), your exemption deduction may be phased out partially or totally..

The thresholds for the phaseout of exemptions are the same as for the reduction of overall itemized deductions. The difference is, the reduction for itemized deductions can never exceed 80%, but the exemption deduction can be completely eliminated if AGI is high enough.

The thresholds for the phaseout of personal exemptions are as follows:

If your 2013 filing status is - Phaseout applies if AGI exceeds - Exemptions Phased Out Completely if AGI exceeds -
Married filing jointly or Qualifying Widow/widower $300,000 $422,500
Head of household 275,000 397,500
Single 250,000 372,500
Married filing separately 150,000 211,250
Thresholds will be adjusted for inflation annually.

The Phaseout computation:

For the filing status in the first three rows in the chart above, the difference between the amounts in the two columns is $122,500. This is the phaseout range. For married filing separately, the phaseout range is $61,250 ($211,250 minus $150,000).

If your AGI falls within the phaseout range for your filing status, your exemption deduction is reduced by 2% for every $2,500 of AGI (or fraction of $2,500) in excess of the threshold amount ($300,000, $275,000, or $250,000).

If married filing separately, the 2% reduction applies to every $1,250 (or fraction of $1,250) of AGI exceeding the $150,000 threshold.

Example:

In 2013, John and Mary are married with two children. They file a joint return and claim four exemptions ($3,900 each) totaling $15,600. They report adjusted gross income (AGI) of $357,950.

They will only be allowed to claim $8,112 as their personal exemption ($15,600 minus $7,488), figured as follows:

1. Exemption deduction before phaseout (4 x $3,900) $15,600
2. Adjusted gross income 357,950
3. Phaseout threshold for joint return 300,000
4. AGI in excess of threshold (Line 2 minus Line3) 57,950
5. 2% for every $2,500 or fraction thereof:
$57,950 (Line 4) divided by 2,500 = 23.18, rounded up to 24
24
6. 24 (Line 5) x 2% = 48% (this is the phase out percentage) 48%
7. $15,600 (Line 1) x 48% (Line 6) = the disallowed amount 7,488
8. Exemption Deduction Allowed (Line 1 minus Line 7) $8,112

Home Office Deduction Safe Harbor Method

For 2013, instead of going through the regular computation procedure for computing the home office deduction, the IRS is allowing taxpayers to use an optional method, called the safe harbor method, for figuring the deduction. You're allowed $5 per square foot up to a maximum of 300 square feet of office space, for a maximum deduction of $1,500.

You figure the deduction on a worksheet in the instructions for Line 30 of Schedule C.

Points to keep in mind when using the safe harbor method:

  • You may decide to use the safe harbor method year to year.
  • If the safe harbor deduction amount exceeds Schedule C net income, the excess amount may not be carried over to the following year and is lost forever.
  • If you use the safe harbor amount, no additional depreciation allowance may be claimed.
  • In a future year, if you decide to deduct actual costs, you must disregard the year (or years) in which depreciation was not claimed when computing depreciation.
  • For example, say you started claiming the home office deduction in 2010 but in 2013 you decide to use the new safe harbor method. Then, in 2014 you go back to using actual expenses. When figuring depreciation for 2014, you would be in year 4 instead of year 5 (2010, 2011, 2012, and 2014); 2013 is disregarded. So, in the depreciation table, you would use year 4 for 2014 depreciation.

Medical Expense Deduction Floor increased from 7 1/2% to 10% for Taxpayers Under 65 Years Old

Taxpayers Under 65 years old:

Starting in 2013, taxpayers under 65 years old who itemize their deductions will only be allowed to deduct medical expenses that exceed 10% of adjusted gross income. (The deduction floor for medical expenses was 7 1/2% for many years.)

Taxpayers 65 Years Old or Older:

If you or your spouse are 65 years old or older at year end, the 7 1/2% floor will still apply. The 7 1/2% floor will continue to apply through 2016 for those meeting the age 65 test.

Keep in mind, for tax purposes, you are considered 65 years old as of December 31 even if you turned 65 on January 1 of the following year.

If married filing a joint return, the deduction floor for medical expenses applies to the combined income of both spouses.

IRA and Roth IRA Contribution Phaseout

For 2013, the contribution limit for traditional IRAs and Roth IRAs is $5,500, or $6,500 for those age 50 or older.

If you have earnings you may make contributions to a traditional IRA. However, the deduction for your contributions may restricted.

You may be able to claim a full deduction, partial deduction, or no deduction, depending on whether you (and your spouse) have retirement coverage where you work and whether the deduction phaseout rules apply as a result of your modified adjusted gross income (MAGI).

Traditional IRAs:

Active plan participants: The deduction limit for 2013 contributions to a traditional IRA is phased out for active plan participants with modified AGI (MAGI) between:

  • $59,000 and $69,000 for a single person or head of household, or
  • between $95,000 and $115,000 for married persons filing jointly and qualifying widows and widowers.

Phaseout range if not an active participant:

  • $178,000-$188,000 for a spouse who is not an active plan participant and who files jointly with a spouse who is an active plan participant.

Roth IRAs:

The 2013 Roth IRA contribution limit is phased out for:

  • a single person or head of household with MAGI between $112.000 and $127,000, and
  • for married persons filing jointly and qualifying windows and widowers with MAGI between $178.000 and $188,000.

There is no deduction for Roth contributions.

Alternative Minimum tax (AMT) Exemption and Tax Brackets

For 2013, the AMT exemptions (prior to any phaseout) are $80,800 for married couples filing jointly, $51,900 for single persons and heads of households, and $40,400 for married persons filing separately.

Staring in 2013, there will be an inflation adjustment for the AMT exemptions, exemption phaseout thresholds, and the diving line between the 26% and 28% AMT barracker.

Deduction Limits for Long-Term Care Premiums

Depending on your age, all or part of your premium payments for a qualified long-term-care policy may be deducted as a medical expense, subject to the AGI floor (10%, if under 65 or 7 1/2% if 65 or over)..

For 2013, the allowable long-term-care premium you may include in your medical expenses is:

  • $360 for covered persons age 40 or under at the end of 2013.
  • $680 if age 41 through 50.
  • $1,360 if age 51 through 60
  • $3,640 if age 61 through 70
  • $4,550 for those over 70

Benefits from a qualified long-term-care insurance contract (other than dividends) are generally excludable from income. Form 1099-LTC shows payments to you from a long-term-care insurance contract.

Annual Exclusion for Gifts

For 2013 gift tax purposes, the per-donee exclusion for cash gifts or gifts of present interest in property is $14,000 or $28,000 if your spouse consents on Form 709 to "split" your gifts. The exclusion is only allowed for cash gifts or gifts of present interest in property.

Gifts to your spouse are tax free under the gift tax marital deduction if your spouse is a U.S. citizen at the time of the gift.

Gift Tax and Estate Tax Exemption

For 2013, the basic exemption amount for gift tax and estate tax purposes is $5,250,000, up from $5,120,000 in 2012. For 2013, the top estate tax rate is increased to 40%, up from 35% in 2012.

Saver's Credit

Depending on your adjusted gross income (AGI), if you made contributions to a retirement plan, including a traditional IRA or Roth IRA, you may be able to claim the retirement savings contribution credit (saver's credit) on your 2013 return.

AGI is increased by the following:

  • Income from Puerto Rico or American Samoa
  • Any exclusion for foreign earned income
  • The foreign housing exclusion or deduction

For 2013, the adjusted gross income brackets for the 10%, 20%, and 50% credits are increased. No credit is allowed for:

  • Single taxpayers with AGI of $29,500
  • Heads of households with AGI of $44,250
  • Married persons filing jointly with AGI of $59,000

The applicable percentage applies to the first $2,000 of your contributions.

You cannot claim the saver's credit for 2013 regardless of your income if:

  • You were born after January 1,1996
  • You are claimed as a dependent on another taxpayer's return
  • You were a full-time student during five or more months in 2013
Saver's Credit Based on Adjusted Gross Income for 2013
Credit Rate Married Filing Jointly Head of Household Single, Married Filing Separately, or Qualifying Widow or Widower
50% up to $35,500 up to $26,625 up to $17,750
20% $35,501 - $38,500 $26,626 - $28,875 $17,751 - $19,250
10% $38,501 - $59,000 $28,876 - $44,250 $19,251 - $29,500
0% over $59,000 over $44,250 over $29,500

More information on the saver's credit

File your personal and small business taxes (Schedule C)