What’s New – 2014

What’s New for 2013-

What’s New – Important Tax Changes While You File Your 2013 Tax Return

ITIN procedure application procedure changes. Form W-7, Application for IRS Individual Taxpayer Identification Number, must include original documentation such as passports and birth certificates, or certified copies of these documents by the issuing agency. Notarized or Apostilled copies of documentation will not be accepted. As a Certifying Acceptance Agents (CAAS), we can still submit Forms W-7 on behalf of our clients and are allowed to use Form 14194 to certify that we have reviewed and verified the original documentation or a certified copy from the issuing agency of those documents through face-to-face or video electronic interviews with all primary and secondary applicants. CAAs are required to submit copies of the documents that we reviewed for the primary and secondary applicants along with the Form 14194. You are required to attach the original documents or certified copies from issuing agency for dependents. Note the exempt applicants may apply to you.

Additional Medicare Tax. For tax years beginning after December 31, 2012, a 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. You may need to include this amount when figuring your estimated tax. See the instructions for line 12 of the 2013 Estimated Tax Worksheet. For more information on Additional Medicare Tax, go to IRS.gov and enter “Additional Medicare Tax” in the search box.

Net Investment Income Tax. For tax years beginning after December 31, 2012, you may be subject to Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. NIIT may need to be included when figuring estimated tax. See the instructions for line 12 of the 2013 Estimated Tax Worksheet. For more information on NIIT, go to IRS.gov and enter “Net Investment Income Tax” in the search box.

Medical and dental expenses. Beginning January 1, 2013, you can deduct only the part of your medical and dental expenses that exceed 10% of your adjusted gross income (7.5% if either you or your spouse is age 65 or older).

Income limits for excluding education savings bond interest increased. In order to exclude interest, your modified adjusted gross income (MAGI) must be less than $87,700 ($142,050 if married filing jointly or qualifying widow(er)).

Foreign earned income exclusion. The maximum exclusion has increased to $97,600.

Standard mileage rates. The rate for business use of your vehicle is increased to 56½ cents per mile. The rate for use of your vehicle to get medical care or move is increased to 24 cents per mile. The rate of 14 cents per mile for charitable use is unchanged.

Personal exemption increased for certain taxpayers. For tax years beginning in 2013, the personal exemption amount is increased to $3,900 for taxpayers with adjusted gross income at or below $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, and $150,000 if married filing separately. The personal exemption amount for taxpayers with adjusted gross income above these thresholds may be reduced.

Limitation on itemized deductions. Beginning in 2013, itemized deductions for taxpayers with adjusted gross income above $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, and $150,000 if married filing separately may be reduced.

Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $51,900 ($80,800 if married filing jointly or qualifying widow(er); $40,400 if married filing separately).

Lifetime learning credit income limits. In order to claim a lifetime learning credit, your MAGI must be less than $63,000 ($127,000 if married filing jointly).

Retirement savings contribution credit income limits increased. In order to claim this credit, your MAGI must be less than $29,500 ($59,000 if married filing jointly; $44,250 if head of household).

Retirement savings contribution credit income limits increased. In order to claim this credit, your MAGI must be less than $29,500 ($59,000 if married filing jointly; $44,250 if head of household).

Tax-free distributions from an IRA for charitable purposes. You can elect to treat a qualified charitable distribution (QCD) made in January 2013 as if it was made in 2012. Additionally, any portion of a distribution from an IRA contributed to a charity before February 1, 2013, can be treated as a QCD for 2012 if it meets certain requirements. See Publication 590, Individual Retirement Arrangements (IRAs), for more information.

Adoption credit or exclusion. The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $12,970. In order to claim either the credit or exclusion, your MAGI must be less than $234,580.

Increase in employee’s share of payroll tax. Social security will be withheld from an employee’s wages at the rate of 6.2% (up from 4.2%) up to the social security wage limit of $113,700. There is no change to Medicare withholding.The same increase applies to net earnings from self-employment—the rate will be 12.4% (up from 10.4%) up to the social security wage limit of $113,700. In addition, the deduction for self-employment tax has been restored to 50%.

Earned income credit (EIC). You may be able to take the EIC in 2013 if:

  • Three or more children lived with you and you earned less than $46,227 ($51,567 if married filing jointly),
  • Two children lived with you and you earned less than $43,038 ($48,378 if married filing jointly),
  • One child lived with you and you earned less than $37,870 ($43,210 if married filing jointly), or
  • A child did not live with you and you earned less than $14,340 ($19,680 if married filing jointly).

Social security (FICA) tax.  Generally, each employer for whom you work during the tax year must withhold social security tax up to the annual limit. The annual limit is $113,700 in 2013.

 Estate and Gift Tax

The unified credit equivalent is $1,500,000 (2004 – 2005), $2,000,000 (2006 – 2008), $3,500,000 (2009) and increases to $5,000,000 for decedents dying after December 31, 2009 and before January 1, 2013. The unified credit equivalent is $5,250,000 in 2013.

For Estate Tax returns after 12/31/1976, Line 4 of Form 706, United State Estate, lists the cumulative amount of adjusted taxable gifts within the meaning of IRC section 2503. The computation of gift tax payable (Line 7 of Form 706) uses the IRC section 2001(c) rate schedule in effect as of the date of the decedent’s death, rather than the actual amount of gift taxes paid with respect to the gifts.

With the top bracket tax rates decreasing from 55 percent (in 2001) down to 35 percent (in 2010) and a periodic drop in rates in-between, the IRS has encountered situations where gift taxes paid were greater than the tax calculated using the rate in effect at the date of death.

It appears that some Form 706 software used by practitioners require a manual input of the gift tax payable line. Some preparers are reporting gift taxes actually paid rather than calculating the gift tax payable under date of death rates. These errors result in underpayment of estate tax due. Cases with this issue will involve estates where large gifts were made during life and at a time when tax rates were higher than at date of death. (Posted 6-5-06)

Exclusions

  • The annual exclusion for gifts is $11,000 (2004 – 2005), $12,000 (2006 – 2008), $13,000 ( 2009 – 2013), and $14,000 in 2013.
  • The applicable exclusion amount is increased to $5,000,000 for estates of decedents dying on or after December 31, 2009.
  • The applicable exclusion amount for gifts made after December 31, 2009 is $1,000,000.  For gifts made after December 31, 2010, the applicable exclusion amount is increased to $5,000,000.

Education Credit — American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit originally modified the existing Hope credit for tax years 2009 and 2010, and was later extended for an additional two years – 2011 and 2012, making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

Special rules applied to students attending college in a Midwestern disaster area for tax-year 2009, only, when taxpayers could choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.