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Your 2013 US Federal Income Tax Checklist

Your 2013 US Federal Income Tax Checklist

Now that the month of February is upon us, tax season has officially begun. The IRS opened filing for 2013 returns on January 31, although certain forms for those with more complex tax situations will not be finalized for a few days yet. If you were wondering, no, the rules are not any simpler this year—quite the contrary, in fact. Publisher CCH Group produces what is generally accepted as the authoritative private-sector guide to the federal tax code. If there were a tax season equivalent to Groundhog Day—perhaps one in which a pale, celluloid-visored accountant emerged from his cubicle, sized up the CCH tax guide for the year, and then possibly retreated back into his cubicle as a result—the omen for this year would not be favorable. (Exactly what the tax equivalent of six more weeks of winter would be, however, we can’t say for certain….)

In 2004 the CCH guide weighed in at a bookshelf-straining 60,000 pages. By 2013 it was up to 73,954 pages, and this year it has edged up the scale a bit more to 74,608 pages. In case you were wondering, yes, that is a record. Shocking, we know—the government has not taken steps to simplify the tax code.

Most of the Bush-era tax cuts have ridden off into the sunset

Legislators love putting sunset provisions into laws. It’s a way of passing the buck, because it forces reconsideration of the law at some later date when its provisions are up for automatic expiration unless renewed and allows lawmakers to point at their legislation and proclaim, “See, it’s only temporary.” You may recall the brouhaha that erupted when the time came to renew the tax cuts enacted under the George W. Bush administration, the debate sharpened by widespread feelings that the recession was not entirely ended.

The bottom line is fairly simple: Tax rates are generally higher, and this is particularly true for higher-income individuals. Most significantly, the top tax bracket was 35 percent in 2012; for 2013 it is 39.6 percent, applicable to income over $400,000 for single filers and $450,000 for joint married filers. (The brackets will be slightly higher for 2014, starting at $406,750 and $457,600 respectively.)

The reduction in long-term capital gains tax rates to 15 percent remains in effect except for—you guessed it—high-income taxpayers. For those in the top bracket, the rate has returned to 20 percent. (For those in the bottom two brackets, the rate is actually zero, but this is not much of a boon considering that few individuals in these brackets tend to have capital gains income.) The higher rate is not the end of it, either.

The Affordable Care Act: It’s not just affecting your health insurance premiums

As part of the financing of the Affordable Care Act, there is now a 3.8 percent surtax on net investment income. This is designed to mimic the combined employee and employer shares of the Medicare (HI) payroll tax, which has also increased. Normally the Medicare tax is 1.45 percent each from the employer and the employee, but those earning more than $200,000 (for individuals) or $250,000 (for married couples) are now hit with an additional 0.9 percent—and yes, this includes self-employment income.

The net investment income tax applies to passive income, including interest, dividends, royalties, annuities, and rents, which is “not derived in the ordinary course of business or trade.” For example, a taxpayer who is a passive member of a corporation or partnership and receives income as a result would be subject to this tax. It also extends to capital gains received from the sale of the taxpayer’s primary residence if those gains exceed $250,000 for single filers or $500,000 for joint married filers.

It’s not just what you pay, it’s what you don’t get to deduct

The tax rules have in many cases changed in more subtle ways. Some deductions and exemptions now begin phasing out based on income. The standard personal exemption for dependents is $3,900 each, but at income levels of $250,000 for individuals and $300,000 for married couples it begins to decrease.

Similarly, the standard threshold for deducting medical expenses (when itemizing deductions) has been 7.5 percent of adjusted gross income. For 2013, however, that number has increased to 10 percent for taxpayers under 65 years of age.

Beware, too, of the unintentional (at least, we certainly hope it was unintentional) “bait and switch.” A few rules have actually been simplified, but that’s not the end of the story. One example is the deduction for business use of the home. For 2013 the deduction calculation has been streamlined. The catch is that using the simplified method limits the deduction to $1,500. (The previous, more complicated method is still available and may be preferable for some taxpayers.)

Writing the rules for same-sex couples

The federal government was impacted the most by the U.S. Supreme Court’s rejection of the Defense of Marriage Act (DOMA) last year. The IRS faced no small project in rule-rewriting as a result.

The IRS ruling on the matter says the same-sex couples who married in a state (or a foreign country) in which same-sex married is legally recognized “generally must” file under either the joint or separate married filing statuses. This holds true even if the couple in question subsequently moved to a state or country that does not recognize their marriage. (Because the federal income tax is a federal matter, federal law supersedes state or local law. This will not be the case for state or local income taxes, which means a same-sex couple now living in a non-recognition jurisdiction could be forced to use different filing statuses for their federal and state/local returns.)

Because some states recognized same-sex marriage prior to 2013, there may be cases in which such couples can amend previous returns to elect one of the married filing statuses. For all the agonizing details, consult IRS Publication 17.

There is only one certainty each year when it comes to federal taxes: something will change. Because of the Affordable Care Act and the expiration of the Bush tax cuts, 2013 has more than its share of changes. High-income taxpayers will be particularly affected and should consult a tax professional not only for their 2013 filings but also to plan tax strategy for 2014.

Ines Zemelman, EA
Founder of TFX