2013 Tax Changes, Credits and Impacts You Need to Be Aware of When Filing Your Tax Return in 2014

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[Updated for 2013-2014 tax filing season] Thanks to the so called fiscal cliff deal reached last year there were a number of impacts to taxes in 2013 which you need to be aware of when filing your 2014 taxes. Changes were in the form of updated federal tax rates, new phase out deductions and the expiry or extension of some popular stimulus tax breaks. On average it is estimated almost 75% of American individuals will see a significant tax impact when filing their 2013 tax returns.

2013 Federal Income Tax Rates

Unless you make more $450,000/$400,000/$425,000 (married/single/head of household) in 2013, you won’t see a rise in your marginal federal tax rate. For the 1% who do make more than this amount, their top marginal tax rate returns to the Clinton-era level of 39.6%. But the better news for most of us in terms of federal taxes is that tax brackets are being raised to account for inflation. This means that you will pay less in taxes in 2013 if your income did not rise over 2012 levels. Here is the official 2013 IRS tax table for federal income tax rates:

2013 Federal IRS Tax Tables

Higher income earners will also take a hit on their 2013 federal taxes because the fiscal cliff legislation reinstates limits on personal exemptions and itemized deductions for couples making more than $300,000 (singles making more than $250,000).

The alternative minimum tax (AMT) has also been permanently fixed to prevent it from expanding to more households and Congress having to apply a new patch every year. This is a huge deal for millions of Americans whose filing has been delayed in past years due to delays in getting AMT patches in place.

Capital Gain and Dividend Tax Rates

Top tax rates on investment income – long term capital gains and dividends – will rise to 20% from 15% for higher income households. That is, those with an adjusted gross income (AGI) above $450,000/$400,000 (married/single). The rise to 20% does not include the 3.8% Obama health care surtax which also applies to investment income for higher income earners.

For those below this higher income level, long term capital gains and dividends shall continue to be taxed at 15%. Short term capital gains will continue to be taxed at marginal tax rates.

Payroll Tax Credit Gone in 2013

As expected the stimulus driven 2 percent cut in Americans’ payroll taxes, effective in 2011 and 2012, was not extended in 2013. You can see this article for the up to $2,200 impact on your 2013 paycheck with the expiry of this credit. In fact the main reason most Americans will see a cut in their 2013 paychecks due to higher taxes is related to the expiry of this credit.

Popular Tax Credits Extended to 2017

Multi-year extensions have also been approved for a number of popular tax credits that benefit lower income families. This includes the American Opportunity Education Tax Credit (AOTC) for college tuition, expanded earned income tax credit (EITC) and Child Tax Credit (CTC).

The above tax changes are the most likely to impact you and most Americans next year. But there were also a lot of other non-tax changes in the fiscal cliff deal like funding for extending unemployment benefits to the end of the year, small business tax credits and Roth 401(k) conversion provisions to fund delays in spending (sequester) cuts.

Congress’ next challenge will be to deal with the debt ceiling limit and spending/sequestration cuts that may cut other benefits. I’ll post updates as this story evolves and encourage you to stay in touch via RSSEmailFacebook or Twitter to get the latest news.

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{ 2 comments… read them below or add one }

Gil Friese January 6, 2013 at 7:14 pm

My newspaper states that the IRA Charitable Rollover has been resurrected for calendar years 2012-2013 as part of the fiscal cliff deal.
True, false, or comment?

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Andy (Author) January 6, 2013 at 8:30 pm

True. The fiscal cliff deal did extend the so-called IRA charitable rollover that allows people 70½ and older to transfer as much as $100,000 per year from their traditional IRAs to charity (and he donation can count against the minimum required distribution). The provision last expired at the end of 2011, but was extended to the end of 2013.

To execute this transaction you must work through the custodian of the IRA account to send a certain sum directly to charity, rather than directly withdrawing it yourself.

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