New Simplified Home Office Deduction

Starting with the 2013 tax return, taxpayers with home based businesses can take a simple approach to determining this deduction. All you have to do is multiply the business square footage by $5 a square foot and that is your deduction. The amount you can take maxes out at $1,500 a year so if there is more than 300 square feet this method might not be beneficial. You can still claim 100% of the mortgage interest and real estate tax as itemized deductions but no depreciation is allowed. The IRS estimates that his will save taxpayers 1.6 million hours a year. See Revenue Procedure 2013-13 for more details.

Georgia Retirement Income Exclusion

The Georgia retirement income exclusion has been increased to $65,000 for those 65 and older for 2012 from $35,000 in 2011. For those aged 62 through 64, the  maximum exclusion remains at $35,000. Earned income such as wages has a separate limit of $4,000. This exclusion is also available to those less than 62 if they are permanently disabled and thus can't work. Social security is not included in the exclusion since it is not taxable at all by Georgia.

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.