What you need to know about tax law changes as you prepare your 2013 tax year return
Significant tax law changes have taken place for 2013 1040 income tax filings. Among them are modifications to the marginal tax rate, Net Investment Income Tax, Medicare Tax and medical expenses, in addition to others. Affected taxpayers should consult with their financial and tax advisors to help understand and prepare for them.
As April 15 approaches, there are several important tax law changes that affect 2013 1040 income tax filings. Perhaps the most significant this tax season is the enactment of the 39.6% marginal tax rate for taxpayers in the higher taxable income brackets.
New Tax Structures Marginal Tax Rate
In 2013, higher-income taxpayers will be subject to a tax on capital gains and qualified dividends of 20%, which represents an increase of 5% from previous years. The high-earner bracket starts at $400,000 in taxable income for individual taxpayers and $425,000 for heads of households. A married couple filing jointly with a taxable income of $450,000 ($225,000 if filing separately) would also be in the 39.6% marginal tax bracket and subject to the 20% capital gains and qualified dividends taxes.
Net Investment Income Tax
The Net Investment Income Tax (NIIT) is also new for 2013. This is a 3.8% surtax assessed on individuals, trusts and estates that have net investment income. Modified adjusted gross income (MAGI) is factored in when calculating this surtax. The NIIT is payable regardless of whether or not the taxpayer has regular income tax or is subject to the alternative minimum tax.
Under the Affordable Care Act (ACA), there will be an additional Medicare Tax of .9%. This tax is on wages, other compensation received and self-employment income. Individual taxpayers and married couples filing jointly in those earned-income categories, and who make in excess of $250,000, will be subject to the .9% Medicare Tax. The same holds true for married couples filing separately and heads of households with earned income in excess of $125,000 and $200,000, respectively.
For 2013, there is a higher threshold for deducting medical expenses. The floor was raised in 2013 to 10% of adjusted gross income. In 2012, the floor was 7.5% of adjusted gross income. Now a taxpayer with an adjusted gross income of $200,000 would only be able to deduct medical expenses on his Schedule A in excess of $20,000. Individual ages 65 and older will still have the tax benefit of the 7.5% floor.
Flexible Spending Arrangements
Another tax law change brought about by the ACA is the cap on contributions to health flexible spending arrangements (FSAs). An FSA allows employees to set aside a portion of their earnings to pay for certain expenses. Established as a cafeteria plan, these expenses include medical and dependent-care expenses, among several others. In 2013, the allowable contribution to health FSAs will be capped at $2,500 per year. After 2013, this amount will be indexed for inflation.