Happy New Year!
I don't know what you did on New Year's Eve, but we all know what Congress did: they finally hammered down some tax legislation for 2013 and beyond.
These last-minutes decisions put the IRS behind when it comes to processing tax returns because the agency has to work to update its software to adjust for the new laws. But just because the IRS is left scrambling, that shouldn't stop you from preparing your income tax return. Even if you can't electronically file as yet, now is the time to get your return in order so you know the news – good or bad – in advance.
Here are the new tax changes for 2013:
If you are a high-income household making more than $400,000 (single) or $450,000 (married filing joint), your tax bracket will be up to 39.6% from 35%. However, this will not affect your 2012 income tax return. Those in the new high tax bracket will also be subject to a capital gains rate of 20% - up from 15% as well as the 3.8% surcharge from the Affordable Care Act.
In a speech following the congressional vote, President Barack Obama declared that the changes pushed through will not affect 98% of Americans.
In the fiscal cliff legislation, the Pease itemized deduction phase-out is reinstated and the personal exemption phase-out will be reinstated. The thresholds are $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single. This means that if you make that kind of money, you will not be allowed to take all of your itemized deductions. Your personal exemptions – another subtraction from your income before taxes are calculated – will be reduced.
Employees' net pay is also now 2% lower as the payroll tax holiday was allowed to expire. This means the full 6.2% of Social Security will now be withheld from your pay. The holiday lasted two years, and this increased percentage will help continue funding to the Social Security system. The wage ceiling on which Social Security is taxed has been increased to $113,700. Medicare tax is unlimited, but if you earn more than $200,000 an additional 0.9% will be withhold.
Congress patched the Alternative Minimum tax and adjusted it for inflation, which will keep taxes lower for the 60 million Americans that would have been affected.
While Congress did take a scalpel to some tax deductions others were left untouched and extended through 2013:
1. Discharge of qualified principal residence exclusion. Filers going through a foreclosure or short sale who may have had loan forgiveness should look into this as it will exclude most, if not all, of the forgiven amount from taxable income
2. Educators may continue to deduct $250 in related job expenses as an adjustment to income
3. Mortgage insurance premiums may be deducted as mortgage interest
4. The deduction for state and local sales taxes may still be taken
5. The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017;
6. Tuition costs may be deducted as an adjustment to income
7. IRA-to-charity exclusion from taxable income remains including a special provision that allows transfers made in January 2013 to be treated as made in 2012.
Beginning on Jan. 1, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be 56.5 cents per mile for business miles driven, 24 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.