By Dan Ritter
At over 4 million words and an edit rate of more than once per day, the U.S. tax code is a constantly evolving labyrinth of exceptions, special conditions, and byzantine bureaucracy that (let’s face it) most people don’t understand. Americans spend an estimated 6 billion hours each year doing taxes or jumping through tax-related hoops — that’s nearly 25 hours for every person above the age of 18. We imagine most of it is spent finding creative ways to curse the Internal Revenue Service, creating voodoo dolls of Uncle Sam, or simply staring at the wall in a defeated, mind-numbing rage.
If you’re like most Americans, though, you just bite the bullet, hire a professional, and wipe your hands of the whole mess. According to a report from Nina Olsen, the National Taxpayer Advocate, 60 percent of Americans hire a professional to shoulder the soul-crushing burden of tax preparation. This is great, if you can afford it. What’s 25 hours of your time worth?
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For those who can’t or don’t want to use professional assistance, there are really just two roads to follow. Either you resign yourself to your fate and, like 10 percent of Americans, file your taxes without any assistance — or you use commercial software that can help expedite the process. Whatever road you take, though, it helps to have a certain level of background knowledge about the tax code. In particular, it helps to know which taxes or deductions (especially those that apply to you) are changing. Here are some tax changes that took effect in 2013 that apply to many Americans, courtesy of the IRS.
1. Additional Medicare Tax
You are probably already familiar with the Medicare tax. Historically, Uncle Sam has charged a 2.9 percent tax to fund the healthcare service that was flat across all income levels. Half of it, 1.45 percent, is withheld from your paycheck, while the other half is paid by your employer. Those of you who are self employed know that you have to shoulder the whole 2.9 percent yourself.
Beginning in 2013, though, the government is charging an additional 0.9 percent for Medicare on Americans with incomes above a certain threshold. The new rate of 3.8 percent will apply to incomes of more than $125,000 for married single filers, $250,000 for married joint filers, and $200,000 for all other filers.
Despite all of those “no new taxes” type promises, tax bills are expected to edge higher for a number of taxpayers for the 2013 tax year. And 2014 holds even more surprises. Here’s a quick look at what to expect:
Higher income taxpayers are going to pay more. You’re going to figure this out in a few months when you file your tax return. And it’s no fluke. It will happen again in 2014.
First, the top tax rate for taxpayers is now 39.6%. We haven’t seen those kind of rates in almost 15 years. Those Bush-era tax cuts have finally expired, giving us the 20th century tax rates (gosh, that sounds really, really old). How high will it go? The 39.6% tax rate kicks in at $400,000 for individual taxpayers and $450,000 for married couples filing jointly.
All wages are subject to Medicare tax. That hasn’t changed. But now, taxpayers who make over $200,000 ($250,000 for married taxpayers) will be subject to the Medicare surtax. If that’s you, a Medicare surtax will be tacked on to your wages, compensation, or self-employment income over that amount. The amount of the surcharge is .9%.
Even if you aren’t affected by the Medicare tax surcharge, you still may be subject to the Net Investment Income Tax (NIIT) if you have both net investment income and modified adjusted gross income (MAGI) of at least $200,000 for an individual taxpayer and $250,000 for taxpayers filing as married. Net investment income includes items like interest, dividends, capital gains, rental and royalty income, and certain income from businesses. It doesn’t include wages, unemployment compensation, operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends and distributions from certain Qualified Plans. For the entire details on the tax – and I mean entire – check out my colleague’s “definitive” answers on the subject.
WHAT YOU NEED TO KNOW
We are surprised how quickly the year has passed! On the income tax scene Congress continues to work on last minute income tax bills as of the date of this letter, but you can be assured we stay abreast of all the latest changes as they occur! With the economic issues this year you can be sure that we will work more diligently than ever to keep your tax bill at the lowest legal amount.
We are once again making our tax organizers available, for free, to anyone who requests one-if you have not used one in the past please call the office to request one for 2013, as it is our attempt to be as thorough as possible in the preparation of your return. If you received an organizer last year we will mail this year’s organizer to the same address. The tax organizer may not be enough however, and we wanted to bring some special items to your attention below.
Home Owner Energy Credits
If you (and spouse if married) made or are considering investing in insulation, storm windows or doors, high efficiency furnaces or water heaters or similar energy improvements there is a 10-30% Federal income tax credit available in many cases. The bad news? It is limited to a maximum of $500 for insulation and storm doors but unlimited for solar, wind and geothermal power!
Recent IRS scrutiny of home mortgage interest deductions now require us to carefully track re-financings and the use of loan proceeds. Please provide us with any new home loan information, closing statements from any re-financings, and a summary of what any additional loan proceeds were used for.
A scary IRS court case in 2008 reminds us of the rules on charitable contributions. ALL deductions of any amount must have a receipt. Any individual contribution over $250 must also have an acknowledgement letter from the charity, and the letter must be dated by the date we file your return. The letter should show the date and amount of any individual contribution over $250, and should also state that no goods or services were received in return for the contribution.
If you have read any news in the last year you know that the IRS is looking closely for offshore accounts. If you have an account, rental property, or business interest with a value over $10,000 in a foreign country, or a foreign business ownership (not through a mutual fund) please let us know as some special rules will apply to you. There are substantial penalties for failure to disclose these items.
Deductible mileage rates changed during the year. Please provide us with the number of medical miles you drove during the year for this deduction. This includes trips to the doctor, dentist, pharmacy, dialysis, as well as any charity related volunteer work mileage.
A major revision of college credits by President Obama has provided us with the “American Opportunity Credit”, a special credit for undergraduate college students. If you have children in college or near to college, please discuss some options with us to assure that you receive the best benefit for these costs.
If you own rental property, this year the IRS has demanded substantially more information. We now need, FOR EACH PROPERTY SEPARATELY, the physical location, the type of property (single-family, duplex, etc), and Forms 1099-K received, and a record, by property of the number of days rented and the number of days used for personal purposes.
Roth IRA Conversions
You will be continue to hear from lots of “experts” this year that you need to convert your retirement accounts to Roth IRAs. While there are a number of advantages to conversions, there are an equal number of disadvantages that carry some major tax consequences. Please do not convert your accounts in 2013 without coming in to see us for an appointment to discuss both the positives and negatives. All conversions for 2013 must be completed by December 31, 2013.
Effective 1/1/2013 the amount you may give to one person in one year without any return filing requirements has been increased to $14,000. Additionally, Congressional inaction on the estate tax front requires most people that have any substantial net worth to immediately consider estate planning. Please contact us to discuss these issues.
Worthless Stocks and Bonds
If you own stocks or bonds that became worthless this year please be sure to provide us with the cost and purchase dates so that we can take any allowable deductions.
There is still time to setup an appointment for year end tax planning by December 31. We recommend a meeting if you have had any major changes during 2013 or are expecting major financial changes in 2013 such as retirement, inheritances, etc.
Future Income Tax Rates & Other
Now that the Congress has passed the biggest tax increase since World War II we can do some planning for future years. Congress has also dramatically changed the estate tax rules for the future. In both cases we highly recommend that when you are getting your information to us for your 2013 Federal tax return that you set an appointment for an after tax season “Tax Tune Up” to examine tax and estate planning strategies. If your income is over $200,000 it is almost mandatory that we meet for future tax planning because of surtaxes.
If you receive any Form 1099-k please be sure to bring it to us, it may have a direct impact on your return.
There are literally hundreds of other changes, extensions and deletions that we will consider this year while preparing your return. Because of these changes we are requesting everyone to try to have their tax information in to us at least two weeks earlier than normal, and no later than March 21, 2014. Please rest assured that we will utilize our best resources to once again provide you with timely, complete and accurate service while keeping your tax burden to the lowest legal amount. Thank you again for your continued support.