Social Security Changes for 2013

Monthly social security benefits increased 1.7% in 2013 due to the cost of living adjustment. This increase affects nearly 62 million Americans. The amount of earnings subject to the social security tax also increased to $113,700 from $110,100 which increases the tax for an estimated 10 million taxpayers. If you are under the full retirement age and drawing social security, you can still get full benefits if you earn (W2 and self employment income) less than $15,120 in 2013 which is up from $14,640 in 2012.

Top 10 Things You need to Know About the New Tax Law

The American Taxpayer Relief Act of 2012 enacted this month contains 164 pages of tax law changes. Below are the top ten changes that will affect taxpayers:

1. The top marginal rate increased to 39.6% from 35% for single taxpayers making over $400,000 and married taxpayers making over $450,000 effective 1/1/2013.
2.  The rate for long term capital gains and qualified dividends increased from 15% to 20% effective 1/1/2013 for only those taxpayers in the top marginal bracket.
3. The 2% reduction in social security payroll taxes expired 12/31/12.
4. The maximum estate and gift tax rate increased from 35% to 40% and the exclusion remained at $5 million adjusted for inflation effective 1/1/2013. The estimated amount for 2013 is $5,220,000.
5. The individual alternative minimum tax exemption was permantly increased and indexed for inflation beginning with 2012. This will prevent millions of taxpayers from being exposed to this tax.
6. The option to deduct sales tax instead of state and local income tax which expired at the end of 2011 has been extended through 2013.
7. Itemized deductions will be limited for higher income taxpayers with adjustd gross income(AGI) over $200,000 for singles and $250,000 for joint filers. The reduction is equal to 3% of the AGI over the thresholds. This is effective 1/1/2013. This law had been phased out 1/1/2010.
8. Taxpayers will also lose part of their personal exemptions effective 1/1/2013 if their AGI is above the $200,000/$250,000 amounts. This law had been phased out 1/1/2010.
9. The credit for energy efficient home improvements of $500 which expired at the end of 2011 has been extended through 2013.
10. 50% bonus depreciation for qualifying property which expired at the end of 2012 has been extended through 2013. The property has to be new property.

Sole Proprietors

One in seven 2009 tax returns contained a schedule C which is where you report the income and expenses of a sole proprietor business. You have to be engaged in the business with the intent to make a profit which is determined by facts and circumstances. If you fail the facts and circumstances test, then your business is a hobby and you can't deduct any losses. What kind of deductions can you take? The IRS says you can deduct "all the ordinary and necessary expenses paid in carrying on any trade or business." The IRS further defines ordinary and necessary as appropriate or helpful. What kind of deductions can you not take? The following is just a partial list: charitable contributions unless they qualify as advertising, gifts over $25 unless you can make the case it is marketing, penalties and fines, political contributions, personal living expenses, club dues, and lobbying expenses. Returns with a schedule C have a higher audit profile with the IRS.

Annual Gift tax Exclusion for 2013

The amount you can give to any donee in a calendar year without having to file a gift tax return goes up to $14,000 from $13,000 in 2013. The $14,000 is a cumulative amount for the year so you need to consider other gifts given during the year to see if you go over the total requiring a gift tax return.

Student Loan Interest

Only the person who is legally obligated to repay the student loan can take the deduction for the interest.  Someone who is a dependent on the parent's return cannot take the deduction, and joint filers with income over $150,000 cannot take the student loan interest deduction either. Higher income taxpayers may want to consider having the student be liable for the student loan so when they leave the nest the student can qualify for the deduction.

IRS Standard Mileage Rates for 2013

The standard mileage rate for business miles has increased 1 cent to 56.5 cents per mile. The medical and moving rate is 24 cents per mile, and the charitable rate stays at 14 cents per mile. Mileage should be documented by a taxpayer by some type of contemporaneous written record such as the "enter company mileage" under the company section in Quickbooks or a mileage log.

New Hospital Insurance Tax of .9%

Last week I talked about the new 3.8% tax on investment income or unearned income. Earned income of wages and self employment income also gets hit by Obamacare. Beginning in 2013 there is a new tax of .9% on wages and self employment income for those single filers making over $200,000 or joint filers making over $250,000. For example, if you have a joint return with wages of $100,000 and self employment income of $500,000, the calculation of the tax would be as follows: .009 x ($100,000+$500,000-$250,000) = $3,150.