Dear Client:

2013 is already in its sixth month and half of the year is history. It is time we turn our thoughts to planning for the tax year of 2013.

The American Taxpayer Relief Act of 2013 made certain provisions of the tax code retroactive to 2012 and available for 2013 for individual taxpayers. For many of these provisions 2013 will be the final year unless Congress takes further action. These provisions include:

  • Tax rate increased from the previous 10% to 35% to now include 39.6% for higher income taxpayers - $450,000 married filing jointly, $225,000 married filing separately and $400,000 for others.
  • 15% capital gains rate for sales or exchanges of capital assets held for more than one year. An increase to 20% for taxpayers who are high income earners.
  • Higher income taxpayers will begin to loose itemize deductions – phase out but those claiming the standard deduction will be unaffected.
  • Education Credits:

American Opportunities Credit is limited in 2013 to a maximum of $1,500.

The Above-the-Line deduction for tuition and fees is extended for 2013.

Student loan interest is now an adjustment to income to a maximum of $2,500 regardless of the length of the loan.

Coverdell Educational Savings Accounts are limited to $2,000.

  • The Child Tax Credit of $1,000 for children under age 17 has been made permanent.
  • The Adoption Assistance Credit is reinstated but is not refundable and does have an income limitation.
  • Classroom teacher expense of up to $250 has been reinstated through 2013.
  • Exclusion of Home Mortgage Cancellation of debt up to $2M for married couples and $1M for singles is reinstated through 2013.
  • Private Mortgage Insurance (PMI) remains deductible as home mortgage interest through 2013.
  • State and local sales tax remains deductible through 2013 in lieu of state income tax deductions.
  • Non-taxable IRA withdrawals for charity has been extended through 2013.
  • Estate tax for 2013 has a threshold of $5.25M which also represents the unified credit for gifting.
  • Many business provisions were also extended.

In addition to these changes for 2013 there are several provisions in the Affordable Health Care Act for America which will be major issues for high income earners in 2013.

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  • Medicare Payroll Tax – on wages and self-employment income in excess of $200,000, $250,000 on a jointly filed tax return will increase by 0.9 percent.
  • Medicare Investment Tax – imposes a new 3.8 percent increase on investment income for higher-income taxpayers.
  • Flexible Spending Accounts (FSAs) will be limited to a maximum of $2,500 annual contribution.
  • Many employer and business changes.

These are the known changes for 2013. Congress as it ponders and debates simplification of the tax code will impose further legislation. As the Affordable Health Care for America Act is implemented future years will see additional changes.

The Health Care Exchange, introduced by the health care act, is to be implemented in October, allowing taxpayers to compare and select coverage for health care when they are not otherwise enrolled in health care coverage. 2014 will see the full implementation of the health care law requiring taxpayers to have health insurance or face a penalty on their tax returns.

As your tax professional, I am heavily invested in your tax well-being and being aware of these tax law changes is the first step in surviving these uncharted waters. Next, we must review and see how you will be personally affected by this changing legislation. Be aware, be prepared and be proactive in planning for a favorable outcome to 2013 and 2014.

I am here for you; give us a call today to schedule an appointment time.

Be aware. Be prepared. Be proactive.

Sincerely,