The following are select tax topics affecting individuals and businesses for tax year 2013.
Top Tax Rates
Single filers with taxable incomes exceeding $400,000 ($450,000 for married taxpayers filing jointly) are subject to the top tax rate of 39.6%.
Net Investment Income Tax
The net investment income tax, or NIIT, is a new tax that applies to individual, trust and estate income tax returns and is 3.8% of the lesser of two amounts: net investment income, or the excess of the taxpayer's modified adjusted gross income (MAGI) above $200,000 (single filer) or $250,000 (joint filer). Net investment income includes three broad categories: interest, dividends, annuity, royalty and rental income; net income from a business in which the taxpayer does not materially participate; and business income from trading in financial instruments or commodities, as well as capital gains and other net gains from the sale of investment or passive property.
Additional Medicare Taxes
An additional 0.9% Medicare tax now applies to FICA wages and self-employment income exceeding $200,000 for single taxpayers, $250,000 for joint filers and $125,000 if married filing separately. This is in addition to the existing Medicare tax of 1.45% on all earned income and Social Security tax of 6.2% on earned income up to $117,000.
Capital Gains Tax Rate
The maximum tax rate for long-term gains has increased to 20% for taxpayers in the highest tax bracket (39.6%), remains at 0% for taxpayers below the 15% bracket and remains at 15% for all others.
Alternative Minimum Tax (AMT)
The exemption is increased to $51,900 (from $50,600) for single taxpayers, $80,800 (from $78,750) for joint filers and $40,400 (from $37,225) if married filing separately. These increases are now permanent and will be indexed annually for inflation. Also, certain non-refundable personal credits are permitted to offset the entire regular and AMT tax liabilities.
The personal exemption is $3,900 for 2013, an increase of $100. Phase-outs of the exemptions begin with adjusted gross income (AGI) of $250,000 ($300,000 for married taxpayers filing jointly).
Limitations for Itemized Deductions
The phase-out of itemized deductions (often called the "Pease" Limitation) has returned for 2013. Married taxpayers filing jointly with AGI of $300,000 or higher ($250,000 for single taxpayers) will now see their itemized deductions reduced by 3% of the amount by which their AGI exceeds these thresholds. This reduction is capped at 80% of itemized deductions.
Medical Expense Deduction
The medical expense deduction is now limited to a 10%-of-AGI threshold for taxpayers under age 65. Those age 65 and older (or whose spouse is 65 or older) still have through 2016 to use the 7.5% threshold previously applicable to all taxpayers.
Standard Mileage Rates
The standard mileage rate is 56.5 cents per mile for business use of car, 24 cents per mile for medical and moving purposes and 14 cents per mile for charitable purposes.
Retirement Savings Plans Continue
IRA deductions may be available for those covered by other plans subject to certain dollar limits and phased out for single and joint taxpayers with AGI between $59,000 to $69,000 and $95,000 and $115,000, respectively. For joint filers where only one spouse is covered by another plan, the phase-out range is $178,000 to $188,000.
Roth IRA Income Limits
Roth contributions may be allowed for those with MAGI of less than $127,000 for single taxpayers and $188,000 for joint filers.
American Opportunity Tax Education Credit Continues
Up to $2,500 credit per student is available for qualified higher-education expenses, such as tuition and cost of books. Phase-out begins at MAGI of $80,000 for single filers and $160,000 for joint filers.
Tax Benefits for Adoption
The maximum adoption credit increased to $12,970 for out-of-pocket expenses for the legal adoption of a child. The credit is nonrefundable and phases out for taxpayers with MAGI exceeding $194,580.
As a result of the Supreme Court decision in U.S. v. Windsor and a related IRS Revenue Ruling issued shortly thereafter, same-sex married couples, if married in a state which recognizes same-sex marriages, will be recognized as married for federal tax purposes and may file jointly. The state where a couple was married rather than the state where a couple resides determines a same-sex couple's marital status for federal tax purposes. Civil unions and registered domestic partnerships recognized under state law do not qualify.
Estate and Gift Tax Changes
The top estate and gift tax rate increased to 40%, the estate tax exemption increased to $5.25 million, and the annual per-donee gift tax exclusion increased to $14,000. Additionally, estate tax portability was made permanent.
Foreign Account Reporting
Form 90.22.1, Report of Foreign Bank and Financial Accounts (FBAR), has been renamed FinCen Form 114 and must now be filed electronically. Despite the name change, the reporting requirements remain the same.
Small Business Health Insurance Credit
A credit of up to 35% of employer-paid health insurance premiums (25% for small tax-exempt employers) is available for certain small businesses. Phase-outs of the credit begin for employers with 10 to 25 full-time equivalent employees and average wages between $25,000 and $50,000.
Home Office Safe Harbor
An optional safe-harbor method is now available for calculating the deduction of expenses for the business use of a taxpayer's home. The safe harbor is a simplified method of allowing expenses of $5 per square foot of the portion of the home used for business, rather than the actual expenses for the portion of the home used for business. The safe-harbor method deduction allows for a maximum of 300 square feet, or $1,500 deduction. The criteria to qualify for a home office deduction have not changed.
Property Purchased by Businesses
Repair and capitalization regulations have been issued that govern the timing of expenses for acquiring, maintaining, repairing and replacing tangible personal property and are intended to clarify and simplify tax accounting for fixed assets, as well as creating new safe harbors. For example, businesses may now elect to immediately deduct up to $10,000 in maintenance costs for buildings costing $1 million or less; if costs are less than $10,000, businesses may deduct maintenance costs of up to 2% of the building's adjusted basis. While these new rules apply to tax years beginning after December 31, 2013, early adoption, retroactively to 2012, is permitted.
Section 179 Deduction
Businesses can expense up to $500,000 of qualified depreciable property under Section 179, with phase-out beginning when property placed in service exceeds $2 million. In 2014, the deduction will revert back to $25,000. Off-the-shelf software qualifies for the election through 2013.
Bonus Depreciation Deduction
A bonus depreciation deduction equal to 50% of the unadjusted basis of qualified property continues in 2013 but is set to expire in 2014.
Built-in Gains Tax
The shorter five-year built-in gain recognition period continues in 2013, but is set to expire in 2014.
Work Opportunity Credit
Businesses are eligible for a 40% tax credit for qualified first-year wages paid or incurred during the tax year to individuals who are members of a targeted group of employees, generally those working in excess of 400 hours annually. The credit is reduced for those employees working less than 400 hours. This credit is not available after 2013.
Business Start-up and Organizational Costs
Deductions of up to $5,000 of business start-up and $5,000 of organizational costs paid are available in the year in which an active trade or business begins. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months.