Unraveling the New Tax Laws
The american taxpayer relief act of 2012 (atra) made many existing tax laws permanent, while extending others through 2013, causing many taxpayers to be taken by surprise this year when they begin to file their taxes. despite all of those ‘no new taxes’-type promises, tax bills edge higher for a number of taxpayers for the 2013 tax year. and 2014 holds even more surprises. here’s a look at what to expect this year:
It’s a fact that higher income taxpayers are going to pay more. for example, wage earners making between $500,000 and $600,000 will likely owe between $10,000 and $15,000 more this year. That’s the big news from the fiscal cliff compromise, the increased tax rate high of now 39.6 percent (up from 35 percent). for individual taxpayers, this kicks in at $400,000 and $450,000 for married couples filing jointly.
It’s not just higher-income taxpayers who will feel a pinch, either. All wageearners, including the self-employed, will still be subject to a Medicare tax. While this remains at 2.9 percent, taxpayers who make more than $200,000 ($250,000 for married taxpayers) will also be subject to a Medicare surtax.
Taxpayers haven’t seen these kinds of numbers in nearly 15 years, since the expiration of bush-era tax cuts. You will likely figure this out yourself in a few months, when you file your own tax return. And it’s no fluke.
Acting as a sort of fundraiser for the Affordable Care Act, a 0.9 percent surtax will be tacked on to your wages. What this hopes to accomplish is contribute an estimated $20.5 billion in tax revenue for 2013.
This total 3.8 percent tax is identical to the combined employer/employee tax rates on income such as earned income, income from interest, dividends, annuities and royalties. Rents also figure in the list above of monies that are not derived in the ordinary course of trade or business, excluding active “S” corporation or partnership income.
But if capital gains on a primary home sale exceed $250,000 for individuals or $500,000 for a married couple, and the income threshold is met, the excess realized gain is subject to the 3.8 percent tax.
Other new tax rates this year include the added investment and wages taxes associated with incomes over $200,000 for individuals, or $250,000 for married couples filing jointly.
Remember, “gross income” does not include items such as interest on tax exempt bonds and veteran’s benefits. These are excluded from gross income under the income tax.
Taxpayers in lower-income brackets will be affected by the Affordable Care Act in 2014, too. Here’s the painful truth: If you do not have health insurance in 2014, and don’t otherwise meet certain exemptions, you’re going to have to pay up. The Internal Revenue Service calls this a “shared responsibility payment” (regular folks call it a “penalty”).
While there’s no opting out of paying your taxes, you can lower your tax bracket by deferring income and accelerating deductions. If this is an option for you, deferring income may also help to reduce or avoid adjusted gross income-based (AGI) phase-outs of various itemized deductions and credits.
To claim bonus depreciation or enhanced expensing, you should have acted already. Yes, the option to claim bonus depreciation was extended through the end of 2013—but only at the 50 percent level and only for new property. So, if the property is only new to you, you can elect to “expense” the cost, but you can’t claim bonus depreciation. be mindful that you can only claim an expensing election for assets that are used in an active trade or business.
To qualify for the expensing election, the property must be actively used in your business and purchased by you. On the other hand, bonus depreciation can be claimed for assets used in rental activities and other passive activities, as well as in a trade or business.
Although bonus depreciation and the expensing election may allow you to deduct the entire cost of an asset in the year in which you acquired it, the amount you deduct may have to be “recaptured” when you sell the equipment. This “recapture” will reduce your gain on the sale of the assets, which could work to your disadvantage by increasing your tax liability in the year of sale. You need to think about your net long-term tax liability, rather than simply focus on short-term savings.
Use form 4562: depreciation and Amortization, to make the expensing election on your original tax return for the period. used property (newly purchased by you) can qualify for the expensing election. This contrasts with the rule for bonus depreciation that states only “new property” can qualify for bonus depreciation.
However, if you don’t claim your forms for depreciation and amortization, or expensing election on a return filed before the due date, for tax years beginning in 2003 through 2013, you can change your mind later by filing an amended tax return after the due date. If you acquire used property, your option for deducting the cost in the first year is limited to the expensing election.
Keep in mind that there is a maximum amount of $500,000 in costs that can be deducted for 2013. beginning in 2014, this amount drops to only $25,000. Regardless, the 100 percent bonus depreciation available in 2010, 2011 and 2012 has vanished. And, after 2013, the 50-percent deduction vanishes as well.
Now, when it comes to your pension, the sum of what you can contribute to it, as well as an individual retirement account in 2014, has stayed the same as in 2013. Nothing new there; however, you can deduct costs for business gifts up to $25 for any individual person. The use of a cancelled check, along with a bill, generally establishes the cost of a businessrelated “gift.”
When itemizing such things, provide the exact cost of the gift, the date given and a description. Also, show the business reason for the gift or the business benefit to be gained, or expected to be gained, by giving the gift. Give the name of the person receiving the gift, their occupation and their business relationship to you.
There is a maximum amount that you can elect to expense in any given year. for 2010 through 2013, this maximum amount was $500,000. for 2014, the maximum amount is scheduled to drop to $25,000.
ATRA hiked up the gift tax rate in 2013, however, and implemented a new, permanent maximum estate-tax rate of 40 percent.
Meanwhile, taking a tumble were a number of energy-efficient home improvement tax credits. for example, the up-to-$500 credit for the installation of qualified insulation, windows, doors and roofs, as well as certain water heaters and qualified heating and air conditioning systems evaporated as of december 31, 2013. but the IRS will credit a portion of “green” improvements to your home this year.
There are a few reasons to smile this year, though. If you’re a selfemployed business and your headquarters also double as your home address, you will get something of a break in 2014 in the form of a new, simplified deduction for a home office. The deduction is equal to $5-per-square-foot of home office space—up to a maximum of 300 square feet—or equal to a maximum monetary credit of $1,500.
Home-based business repairs are still deductible, too, as well as service contracts for business equipment. Remember though, if you did the repair work yourself, you cannot deduct the labor cost, only materials. And if you made a repair on another part of your home that affects your home office, like the furnace, it is likely considered an “indirect expense,” because it affects your office “indirectly” and is only partially deductible from your “direct” office expenses.
If you use rental properties as an investment, then they are not considered a trade or business, no matter the income you bring in. Rental homes that have been rented for more than 14 days could be subject to the new 3.8% tax, assuming that you meet the $200,000/$250,000 AGI threshold. In the sale of a secondary home, there is no tax exclusion for the first $250,000/$500,000 of capital gain.
However, if all of your income is from real estate investments you own or operate, you are not subject to the 3.8 percent tax. Your property, in this case, is considered your “trade or business,” and, although you are not responsible for the new 3.8 percent tax, you could be responsible for a tax on the earned income.
Maybe you are thinking of selling all or part of your business assets and you happen to be an “S” corporation that used to be “C” corporation. If so, 2013 was a real good time to close the deal.
A sale of assets by an “S” corporation that used to be a “C” corporation during the “recognition period” is subject to a built-in-gains tax. A built-in-gains tax is imposed on the corporation, at the highest corporate tax rate, on the appreciation in asset value that existed on the date the corporation became an “S” corporation. The shareholders may then be subject to a second tax on distribution of the sales proceeds.
A total of fifty-five tax breaks expired at the end of 2013. Here are some you’ll miss out on in 2014: Charities won’t be able to easily snatch up retirement plan proceeds—a former provision that allowed seniors to make direct gifts to a qualifying charity of up to $100,000 from their individual retirement accounts (IRAs) without reporting it first as income.
Also lost: another “above the line” deduction, this one for tuition and fees. Say bye-bye to the up-to- $4,000 once available for qualified tuition and related expenses that you paid for yourself, your spouse or a dependent. It’s now gone.
There are a few tax extender bills being bandied about that would retroactively reinstate some of the more popular tax deductions. So keep your eye out for them in 2014, or once Congress gets its groove back.