The IRS has announced that there will be a one or two week delay in the start of the 2014 tax season (for 2013 returns), due to the recent 16-day government shutdown. This article explains the delay along with the other factors you need to prepare, including the 2013 income tax rates, investment income rates, new Medicare surtaxes, medical expense deduction changes and a list of expiring tax breaks.
With year-end rapidly approaching, it’s time to consider making moves that will lower your 2013 tax bill. Before you get started, let’s cover some necessary background information to help prepare you for what’s ahead.
The 2013 federal income tax picture for individuals is mostly the same as for 2012, except for people with higher incomes. Here is a quick snapshot that shows the similarities and the differences.
Income Tax Rates
For most people, the federal income tax rates for 2013 are the same as last year: 10, 15, 25, 28, 33, and 35 percent. However, the latest tax law increased the maximum rate for higher-income individuals to 39.6 percent. The new 39.6 percent rate only affects singles with taxable income above $400,000 ($450,000 for married joint filers and $425,000 for heads of households). For 2014, the tax bracket cutoffs are slightly higher, as shown in the table at the bottom of this article.
Capital Gain and Dividend Tax Rates
For most individuals, the federal income tax rate on long-term capital gains and dividends for this year will be either 0 percent or 15 percent — the same as last year. The 0 percent rate applies to gains and dividends that would otherwise fall within the 10 or 15 percent brackets. The latest tax law raised the maximum rate on long-term capital gains and dividends for 2013 to 20 percent for singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000.
For 2014, the taxable income thresholds for the 20 percent rate will be $406,750, $457,600 and $432,200, respectively.
Two New Medicare Surtaxes
Higher-income individuals can get hit by the new 0.9 percent Medicare surtax on wages and self-employment (SE) income. The 0.9 percent tax is charged on salary and/or net SE income of more than $200,000 for singles ($250,000 for married joint-filers).
Higher-income individuals can also see all or part of their net investment income, including long-term capital gains and dividends, hit with the new 3.8 percent Medicare surtax. However, the 3.8 percent tax doesn’t apply unless your modified adjusted gross income (MAGI) exceeds $200,000 for singles ($250,000 for married joint filers). The tax applies to the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.
Itemized Deduction Phase-Out
The last time we saw a phase-out rule for itemized deductions and personal and dependent exemptions was back in 2009. Unfortunately, the phase-out concept is back for 2013 and beyond.
Itemized deductions: Under the current phase-out rule, you can potentially lose up to 80 percent of your write-offs for mortgage interest, state and local income and property taxes, charitable donations, and miscellaneous itemized deductions.
However, the phase-out rule only applies if your adjusted gross income (AGI) exceeds the applicable threshold. AGI is the number at the bottom of page 1 of your Form 1040. It includes all taxable income items and a short list of deductions such as alimony paid to an ex-spouse and moving expenses.
For 2013, the AGI thresholds are $250,000 for singles, $300,000 for married joint-filing couples, and $275,000 for heads of households. The total amount of your affected itemized deductions is reduced by 3 percent of the amount by which your AGI exceeds the applicable threshold.
However, the total reduction cannot exceed 80 percent of the total affected deductions that you started off with.
Personal and dependent exemptions: Under the current phase-out rule, your personal and dependent exemption write-offs for 2013 and beyond can be reduced or even completely eliminated.
However, the phase-out rule only applies if your AGI exceeds the applicable threshold. For 2013, the thresholds are $250,000 for singles, $300,000 for married joint-filing couples, and $275,000 for heads of households.
Medical Expense Write-Offs
Until this year, you could claim an itemized deduction for medical expenses paid for you, your spouse, and your dependents to the extent those expenses exceeded 7.5 percent of AGI. Things change. Thanks to the healthcare legislation, a new and stricter 10 percent-of-AGI threshold for medical expense deductions applies to most individuals — effective for 2013 and later years.
Exception for 2013: If either you or your spouse will be age 65 or older as of December 31, 2013, the unfavorable new 10 percent-of-AGI threshold will not take effect until 2017. Until that year, the familiar 7.5 percent-of-AGI threshold will continue to apply to you.
Exceptions for 2014 and later: If you or your spouse will turn age 65 in 2014, the new 10 percent-of-AGI threshold applies for 2013 but not for 2014-2016 (the old-law 7.5 percent-of-AGI threshold applies for those years). If you or your spouse will turn 65 in 2015, the 10 percent-of-AGI threshold will apply for 2013 and 2014 but not for 2015 and 2016 (the 7.5 percent-of-AGI threshold will apply for those years). If you or your spouse will turn 65 in 2016, the 10 percent-of-AGI threshold applies for 2013-2015 but not for 2016 (the old-law 7.5 percent-of-AGI threshold will apply for that year). The new 10 percent-of-AGI threshold applies to everybody after 2016, regardless of age.
Consider Year-End Strategies to Save Taxes
With these basic individual filing rules in mind, you can make some tax-saving moves by December 31 to potentially lower your 2013 tax bill. Consult with your tax adviser for more information in your situation.
Tax Rates for 2014
Income Tax Bracket | Single | Married filing jointly | Head of Household |
| 10% | $ 0-9,075 | $ 0-18,150 | $ 0-12,950 |
| Beginning of 15% | 9,076 | 18,151 | 12,951 |
| Beginning of 25% | 36,901 | 73,801 | 49,401 |
| Beginning of 28% | 89,351 | 148,851 | 127,551 |
| Beginning of 33% | 186,351 | 226,851 | 206,601 |
| Beginning of 35% | 405,101 | 405,101 | 405,101 |
| Beginning of 39.6% | 406,751 | 457,601 | 432,201 |
IRS Announces 2014 Tax Season Will Start Later
The 2014 tax filing season will be delayed by approximately one to two weeks to allow time to program and test tax processing systems after the 16-day federal government closure, the IRS announced.
The tax agency is “exploring options to shorten the expected delay” and will announce a final decision on the 2014 start date in December. Originally, filing season was to start on January 21. With a one or two-week delay, the IRS would start processing 2013 individual tax returns between January 28 and February 4.
Reason for the delay: The IRS stated the government shutdown occurred during the peak period for preparing its systems for the upcoming filing season to handle processing of nearly 150 million tax returns. “Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year,” the IRS added.
List of Expiring Tax Breaks
The following popular individual federal income tax breaks are scheduled to expire at the end of this year unless Congress extends them. That is likely to happen, but we can’t be sure.
Higher Education Tuition Deduction: This write-off can amount to as much as $4,000 or $2,000 for higher-income individuals.
Option to Deduct State and Local Sales Taxes: Individuals who pay little or no state income taxes have the option of instead claiming an itemized deduction for state and local general sales taxes.
Charitable Donations from IRAs: IRA owners who have reached age 70 1/2 are allowed to make charitable donations of up to $100,000 directly out of their IRAs.
Tax-Free Treatment for Forgiven Mortgage Debt: Forgiven debts generally count as taxable cancellation of debt (COD) income. However, a temporary exception applies to COD income from mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt cancelled in 2007-2013 is treated as tax-free.
$500 Credit for Energy-Efficient Home Improvements: Homeowners can claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The $500 cap must be reduced by any credits claimed in earlier years.
Deduction for Teacher School Expenses: Teachers and other personnel at K-12 schools can deduct up to $250 of school-related expenses paid out of pocket.