2013 Personal Exemption Limitation

You are allowed a $3,900 exemption for yourself, your spouse, and any dependents on the 2013 tax return. However if your adjusted gross income(AGI) is over $250,000(single) or $300,000(joint) then your exemption is reduced by 2% on each $2,500 above the $250,000 and $300,000 thresholds. For example, a married couple with an AGI of $400,000 would see a reduction of their personal exemption of $7,800(3900*2) of $2,000 to $5,800 (.02*2500*100,000/2500=2000).

2013 Itemized Deductions Limitation

You can thank Donald Pease democratic congressman from Ohio for this nice little haircut in your deductions who originally sponsored this legislation. If your adjusted gross income(AGI) exceeds $250,000 (single) or $300,000 (joint), you have to reduce your itemized deductions by 3% of the excess AGI over those amounts. These thresholds will be adjusted for inflation after 2013. All itemized deductions are affected except casualty losses, gambling losses, investment interest, and medical expenses which are not reduced. You also cannot lose more than 80% of the itemized deductions which are affected such as charitable contributions, state and local taxes, mortgage interest, and miscellaneous. For example, a couple with an adjusted gross income of $745,000 would lose $13,350 in itemized deductions based on the following calculation: $745,000-$300,000 x 3% = $13,350.

Self Employment Tax

Self employment tax of 15.3% is imposed on the net profit from all trades and businesses. It can apply to sole proprietors, partners, and members in an LLC. This tax is in addition to income tax and is meant to cover both the employer and employee portions of social security and medicare for the self employed. This can come as a shock to those who quit their W2 job and start their own business. They may have no taxable income but yet still owe tax if they had a net profit on their new business.

Late Filing Penalty

This is a penalty that will  put the hurt on you because the IRS really, really wants you to send in that tax return. They impose a penalty of 5% of the unpaid balance each month that the tax return is late up to a maximum of 25%. An extension can get you another 6 months to file the individual return, but you better send it in by that extended due date of October 15 to avoid the penalty. If you have never had a tax penalty before including a late payment penalty, you will probably be able to get a waiver of the penalty by the IRS. If you have other penalties but never a late filing penalty, you may be able to get 25% of the penalty waived. Even if you can't make any payments on the amount due on your tax return, it is much better for you to send in the return to avoid this punishing penalty.