Recently, the IRS announced inflation adjustments for 2013. As prices rise, and as your buying power decreases, the IRS often adjusts certain items for inflation.
One of the most practical changes made as a result of the American Taxpayer Relief Act of 2012 (also known as fiscal cliff legislation) is that more items are going to be indexed to inflation.
So, not only will there be new limits for different contributions, credits, and deductions, but there will be new policies for figuring how much you owe in taxes.
Tax Year 2013 Inflation Adjustments from the IRS
Here are some of the highlights of the new IRS inflation-adjusted amounts for 2013:
- AMT: The Alternative Minimum Tax is now indexed to inflation. For 2013, the exemption amount is $51,900 for single filers and $80,800 for joint filers. This allows for an automatic adjustment in the future, without Congress having to pass a “patch” on a regular basis.
- Retirement account contributions: Limits for tax-advantaged retirement accounts were raised for 2013. IRA and 401(k) contributions increased by $500 for this year.
- HSA contributions: Individuals can contribute up to $3,250 a year to a Health Savings Account, and families can contribute up to $6,450. Deductible requirements have also risen to $1,250 and $2,500 for individuals and families, respectively.
- Personal exemption: This exemption is up to $3,900. At the same time, though, 2013 marks the first year it is subject to a phaseout starting at $250,000 (single) and $300,000 (joint).
- Standard deduction: Inflation has had its impact on the standard deduction as well. It’s $6,100 for single filers and $12,200 for joint filers.
- EIC: The Earned Income Credit for those with three or more qualifying children has risen to $6,044 for 2013.
- Estate tax exclusion: Rises to $5.25 million for decedents passing away in 2013.
- Commuter exclusion: If you ride in a commuter highway vehicle, or take public transit, and your employer provides you with compensation, you can receive a fringe benefit exclusion on your taxes. The exclusion has been increased to $245.
The fiscal cliff legislation also added a top tax rate of 39.6%. The other tax brackets remain the same, but the new top rate applies to individuals with an annual income of at least $400,000 and joint filers with income exceeding $450,000.
Tax Planning for 2013
These inflation adjustments apply to tax year 2013, so you need to consider them as you plan your tax moves for this coming year (the tax return you will prepare in 2014). It’s possible to take advantage of many of these inflation adjustments if you plan ahead carefully.
For many taxpayers, the best way to take advantage is to pay attention to itemized deductions (you need more of them to make it worth it to itemize rather than stick with the standard deduction), and carefully add them up. The more deductions you have, the better you will be able to lower your income – and possibly keep you under income thresholds related to tax brackets and phaseouts.
Additionally, it can help to boost your retirement account and HSA contributions. With the ability to invest a little more this year, you can improve your future prospects with the help of tax-advantage accounts. If you want a better idea of how you can plan your taxes in 2013, speak with a tax professional about your options.