Preparing your 2013 Tax Returns - Key Changes That May Impact You!

 

Welcome to the New Year, now that the celebrating is over, let start thinking about - Taxes!!  Sorry to put a "damper" on your new year celebrations.  

Tax filing season will officially begin January 31, 2014 - the date the IRS has announced that they will be ready to start accepting paper and electronically filed tax returns.

 

The following is a summary of the key provision of changes in the 2013 tax law which may have an impact on your 2013 taxes.  Although in many cases you may not be able to do anything now to reduce your 2013 taxes, you should use this as an opportunity to plan for 2014 and future years.\

Here is the summary............................................... 

A Tax Increase on the Highest Incomes in 2013.  Taxpayers (including those who receive income through partnerships and S corporations) who earn more than $400,000 ($450,000 for married taxpayers filing jointly) have a marginal tax rate of 39.6%. All other existing rates remain the same.

Higher Capital Gains Rates for Top Earners. The same individuals who are subject to the new 39.6% top rate on income now face a 20% rate on capital gains and dividends, up from 15%. Taxpayers in the 10% and 15% income brackets have a zero capital gains rate and those in the middle will continue to pay 15%.

·        Higher Personal Exemptions Phase-out Levels. The phase-out levels for personal exemptions and itemized deduction have been raised to $300,000 for married couples and surviving spouses and $250,000 for individuals. 

·       Permanent AMT Inflation Indexing (Finally!!). The alternative minimum tax originally was intended to prevent high-income individuals from avoiding taxes. In the absence of a patch for last year, more than 60 million middle-income taxpayers might have been subject to the AMT on their 2012 income. After years of last-minute AMT “patches,” the new law permanently indexes the AMT to inflation starting in tax year 2012. For income you earned in 2012, the exemptions are $50,600 for individuals and $78,750 for married taxpayers filing jointly. 

·        Clarity on Estate and Gift Taxes. After years of uncertainty in this area, the new law holds the estate and gift-tax exclusion at $5 million, indexed for inflation -  $5.2 million in 2013.   The top tax rate jumped to 40% from 35% as of Jan. 1, 2013, but without this change, it would have soared to 55% with a $1 million exclusion amount. The act made permanent the estate tax portability election, which allows a surviving spouse to use a deceased spouse’s unused exemption amount. 

·         Marriage Penalty Relief Retained. Certain taxpayers filing jointly will no longer have to worry about paying more than if they filed as single taxpayers; joint filers also will enjoy a larger standard deduction. 

·        Education Tax Benefits Extended. Most deductions for education expenses will remain in place under the new law. For example, the law extends the deduction for qualified education expenses through 2013.

·        Conversions to Roth Retirement Plans. The new law allows participants in an employer-sponsored 401(k) to transfer any amount to a Roth 401(k) — the funds will be taxed upon conversion.  

·        Tax Relief for Mortgage Loan Modifications. Taxpayers struggling to pay their mortgages, or whose home values have fallen below their purchase price, were given another year of tax relief on any qualifying “indebtedness income” they may receive as a result of a loan modification or short sale on their principal residence.

Net Investment Income Tax.  Taxpayers who have net investment income in 2013 will face a 3.8% surtax on categories of certain unearned income, potentially increasing the total tax rate to 43.4%. This tax is part of the health care reform act. 

 Supreme Court Ruling on DOMA.  The Supreme overturned DOMA during the summer of 2013.  As a result,  Same Sex Married couples (SSM) can now file joint tax returns for federal.  In Utah, we are waiting for word from the Utah State Tax Commission as to whether SSM couples can file a joint tax return for Utah based on the recent ruling by Judge Shelby - unconstitutionality of Amendment 3.  Currently on Appeal to the U.S. Supreme Court.

 

Tax planning should be done in conjunction with preparation of your 2013 tax returns.  For example, if you are currently using an S Corporation for your business and you are in the 39.3% bracket, it may be a good tax planning move to convert your S Corporation to a C Corporation since the top rate in a  C Corporation is 35%.  Of course there are other reasons why you may want to keep using your S Corporation. 

 

 The bottom line here - prepare for 2013, but plan for 2014!!!