Alfred A Cohen, CPA

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With the passing of the American Taxpayer Relief Act of 2012 and the Affordable Care Act of 2013, there are many changes to tax law in 2013.

Unless Congress acts, certain incentives are due to expire at the end of 2013. Business incentives that will be expiring include increased Section 179 expensing, bonus depreciation, and 15 year recovery period for qualified leasehold improvements. In addition, there are personal incentives that will also expire including: deduction for sales tax paid instead of state and local income taxes, tax free distributions from an IRA to a charity, and tax credits for energy saving home improvements.

Some of the changes taking place in 2013 include:

  • Tax rates: Tax rates will only increase for tax payers in the 35% bracket. It will increase to a 39.6% rate for income above a certain threshold. The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amounts for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.
  • Medicare Surcharge: For tax years beginning in 2013, Medicare taxes will increase for high income taxpayers. The first increase is a .9% Medicare tax for all earned income in excess of $200,000 ($250,000 if married filing a joint return). Also beginning in 2013, a 3.8% Medicare tax will be imposed on the lesser of a taxpayer’s investment income or their modified adjusted gross income (MAGI) in excess of $200,000 ($250,000 if married filing a joint return). MAGI does not include interest on tax exempt bonds or veteran’s benefits.
  • Exemption and Itemized Deductions: For tax years beginning after 2012, the Exemption and Itemized Deduction phase-out which had been suspended is reinstated. The phase-out is reinstated with a starting threshold of $300,000 for joint taxpayers and surviving spouse, $275,000 for head of household and $250,000 for single filers and $150,000 for married filing separately.
  • Capital gain and dividend rates rise for higher-income taxpayers: For tax years beginning after 2012, the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When accounting for the 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers will be 23.8%. For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate.
  • Same Sex Marriages: Same sex couples, who are legally married in a state that recognizes same-sex marriages, must file a federal return as either married filing jointly or married filing separately even if they currently live in a state that does not recognize same-sex marriages. Individuals who have entered into registered domestic partnership, civil union or other similar relationship that is not considered a marriage under state law are not considered married for federal tax purposes.
  • Health Insurance: The employer mandate has been postponed until 2015 but the individual mandate still becomes effective January 1, 2014. As of January 1, 2014, the mandate requires all individuals to have minimum health insurance coverage or be subject to a penalty. Coverage can either be via an employer sponsored plan, a plan issued via the marketplace or any other recognized plan. Taxpayers who do not obtain health insurance will be subject to penalties. The declaration of coverage or penalties will be calculated on an individual’s personal income tax return. Depending upon the family income, there are credits available to aid in paying for the insurance. On October 1, 2013, the new health insurance marketplace was opened and can be accessed at . Enrollment will be effective January 1, 2014. In the marketplace there are 4 levels of plan coverage that are available to individuals. Contact your insurance agent for more details.

These are some of the highlights enacted this year. For further information , please contact the office. The 2014 Annual Limits are posted online for your reference.

Have a Happy Holiday Season!

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