Tax season 2014 is underway, which means you should be gathering your documentation and getting ready to file your tax return for 2013. The year 2013 brought a few changes, which means your taxes are likely to look a little different this year.
The IRS will start accepting tax returns on January 31, 2014, and you need to start preparing since you might be affected by the following changes:
1. Higher Tax Rate for High-Income Earners
Starting in the year 2013, the top tax rate returns to 39.6 percent. For those making $400,000 and filing singly, or those making $450,000 and filing jointly, that means higher taxes. You are in a higher tax bracket and should be aware of the way that affects you. If you have long been in the 35 percent tax bracket, you might need to start figuring out how to pay your tax bill.
2. Medicare Surtaxes
There are two new Medicare surtaxes that you might be affected by. First of all, there is the 3.8 percent surtax that is levied against all or part of your investment income (including dividends and long-term capital gains, even though they have favorable status right now). This surtax applies to those who make more than $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately). Form 8960 can help you figure out if you owe this tax.
There is another Medicare surtax as well. This is a 0.9 percent increase related to payroll taxes. If you meet the income test for the 3.8 surtax, you meet this requirement. This is a tax on salary or self-employed income. Use Form 8959 to figure out if you owe under this new surtax.
3. Dependent Exemption Phase-Out
Personal and dependent exemptions can help reduce your income, and thus reduce how much you owe in taxes. Starting with the 2014 tax season (for tax year 2013), there are phase-outs that can affect you. Phaseouts start at $250,000 (single), $300,000 (joint), $150,000 (married filing jointly), $275,000 (head of household). Once you reach a certain point, though, the deduction disappears completely. Be aware that you might not get the same exemption you received in years past.
4. Itemized Deduction Phase-Out
This tax season also sees a change for those who itemize their deductions. If you itemize instead of taking the standard deduction, you might be stuck with a phase-out. Once you reach the income threshold similar to the dependent exemption phase out, you also see the amount of your itemized deductions reduced by 3 percent of the amount your AGI exceeds the threshold. The good news, though, is that the reduction is limited. It doesn’t disappear like the dependent exemption phase out does.
5. Medical Expense Deductions Have a New Threshold
Many high earners choose high deductible health care plans, pay some of their costs out of pocket, and then claim medical expense deductions. However, this will be harder starting in 2014. Prior to the tax year 2013, the threshold was 7.5 percent of AGI. Now, though, you have to spend 10 percent of AGI on medical costs in order to deduct. If you have been taking the medical expenses deduction, you might need to re-evaluate.