Change in Tax Rates

Beginning in 2013, the American Taxpayer Relief Act of 2012 imposes new higher 39.6% and 20% tax rates on ordinary income and long-term capital gains, respectively. The new top ordinary income tax rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately). The 20% capital gain tax rate applies to capital gains and dividends for individuals above the top income tax bracket threshold.

Additional Medicare Tax

Under the 2010 Patient Protection and Affordable Care Act, beginning in 2013, individuals must pay an additional 0.9% Medicare tax on earned income above specified thresholds, i.e. $125,000 if married filing separately, $250,000 if married filing jointly, $200,000 if single, head of household, or qualifying widow(er). The tax applies to both wage and self-employment income.

Net Investment Income Tax

Starting Jan. 1, 2013, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.

Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

Filing status for same-sex married couples

If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filings separately filings status on your 2013 federal income tax return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage.

Credit for prior year minimum tax

The credit for prior year minimum tax is no longer partly refundable.

Medical and dental expenses

The threshold for the post-2012 itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

Personal exemption and itemized deduction phase-out for certain taxpayers

Personal exemptions and itemized deductions are subject to reduction if your adjusted gross income is more than $150,000 if married filing separately, $250,000 if single, $275,000 if head of household, or $300,000 if married filing jointly or qualifying widow(er).

Standard mileage rates

The 2013 rate for business use of your vehicle is increased to 56.5 cents a mile. The 2013 rate for use of your vehicle to get medical care or to move is increased to 24 cents a mile.

New for 2014

Individual Health Insurance Mandate

The Affordable Care Act mandates that individuals (and their dependents) who do not qualify for an exemption have “minimum essential health insurance coverage” for each month beginning in 2014 or be subject to a “shared responsibility penalty.” Refer to the Affordable Care Act for definitions of exemptions such as, members of recognized religious sects who have religious conscientious exemption certification issued by a state insurance marketplace, members of healthcare sharing ministries, incarcerated individuals, members of Indian tribes, individuals with short coverage gaps (less than 3 months), individuals with income below the federal tax return filing threshold, individuals who cannot afford coverage (e.g. required contribution for minimum coverage exceeds 8% of household income), individuals with hardship exemption certificate granted by the state and/or federal insurance marketplace.

In the event a nonexempt individual does not have minimum essential coverage, the individual shared responsibility penalty is imposed. Such penalty is the lesser of (1) the sum of the monthly penalty amounts for each individual in the shared responsibility family or (2) the sum of the monthly national average premium for bronze-level qualified health plans. The monthly penalty amount is equal to 1/12 of the greater of (1) a flat-dollar amount (for 2014 $95 per individual who is at least age 18) or (2) an excess income amount. The excess income amount is the excess of the taxpayer’s household income for the tax year over a threshold gross income amount, i.e. the amount required for an individual to file an income tax return or a particular year, multiplied by a percentage (1% for 2014).

Due to requirements imposed on us by the Internal Revenue Service under Circular 230, we are required to inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the taxpayer.