10 Things You Need to Know Before Doing Your Taxes
The IRS opened for tax season on Jan. 31, 2014, and that means millions of Americans across the country are in the throes of tax preparation “bliss.” There are a few important changes that taxpayers need to know before sitting down to fill out their tax paperwork this year, though. From a simpler process to claim the home office deduction to new tax rates for high-income earners, find out what’s different for tax year 2013 and what might be changing in 2014.
1. Easier home office deduction
For work-from-home warriors, the home office deduction can help reduce tax liability. Unfortunately, the concern about the deduction raising red flags at the IRS has deterred some home-based workers from claiming this deduction. In addition to audit concerns, the process to calculate the deduction was complicated. One of the highlights of the new simplified option is that taxpayers can take a standard deduction of $5 per square foot. For more information, visit the IRS website: Simplified Option for Home Office Deduction.
2. Joint federal returns for married same-sex couples
Gay marriage is a divisive topic for many, but not for the Internal Revenue Service. Starting with tax year 2013, married same-sex couples in one of the 17 states that have legalized gay marriage are able to file their tax returns under the married filing jointly status. For more information, read the IRS FAQ for married same-sex couples.
3. Higher threshold for medical deductions
Prior to tax year 2013, medical expenses in excess of 7.5 percent of a taxpayer’s adjusted gross income (AGI) were deductible. This threshold has been raised to 10 percent for the majority of taxpayers for tax year 2013. The only exception is taxpayers who were aged 65 or older at the end of 2013, to whom the 7.5 percent threshold still applies.
4. New tax rates for high-income earners
High income earners, which can be defined as those who earn more than $200,000 ($250,000 for married couples) are paying more in taxes – and the increase isn’t just limited to income tax. The top income tax bracket increased from 35 percent to 39.6 percent, but other increases include an additional 3.8 percent tax on unearned income and additional 0.9 percent Medicare tax.
5. Higher personal exemption
The personal exemption increased by $100, to $3,900 for tax year 2013. This exemption applies to eligible taxpayers and their dependents. However, a new phase-out rule is in place that limits the amount of the exemption for high-income earners.
6. Itemized deduction and personal exemption phase-outs
High-income households are also being hit with new itemized deduction and personal exemption phase-outs. These itemized deduction changes may impact charitable contributions, mortgage interest, state, local and property taxes and more for individual taxpayers with an adjusted gross income (or AGI) higher than $250,000 and joint filers with an AGI above $300,000.
7. IRA contribution cap increase
Taxpayers aged 50 and older can now take advantage of a higher cap on Individual Retirement Account (IRA) contributions. Taxpayers who meet the criteria can now contribute up to $6,500 annually. IRA contributions for the 2013 tax year can be made through April 15, 2014.
8. Flexible Spending Arrangements limits
Prior to tax year 2013, the IRS did not impose a cap on contributions made to a health flexible spending arrangement account (FSA). According to the IRS, “Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013.”
9. Standard mileage rate
The standard mileage rates used by the IRS have increased for tax year 2013. The standard rate for a personal vehicle used for business is now 56.5 cents per mile. The rate for a vehicle used for transportation to receive medical care or for moving is now 24 cents per mile.
10. Changes for the coming year
- The option to deduct state and local sales taxes instead of state and local income taxes.
- Teachers will no longer be able to deduct $250 for school expenses.
- The $500 credit for energy-efficient home improvements will expire.
- Mortgage debt canceled during a short sale or foreclosure will now be subject to federal income tax.
These are just a few of the many changes that taxpayers can expect to see when they prepare their 2013 tax returns. It’s important to note that everyone’s tax situation varies, and taxpayers are encouraged to contact their tax professional with any questions or concerns.
Article by Melissa Hincha-Ownby
Photo: 401(K) 2013
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