This post deals with 2013 tax deductions, changes and exemptions for planning purposes, which means most of the changes described here will be effective for the 2013 tax year, for which you will file the return on April 15, 2014. The 2012 tax guide will be released on Feb 24. For 2012 tax changes check this post – 2012 tax changes, deductions and exemptions.
I like to think about taxes as soon as the New Year starts. Most of these tax deductions and credits are automated with any tax software like Turbo Tax or H&R Block. But we look at this number only when we have to file the taxes. There are a lot of things that can be planned out to reduce your tax liability legally and most of them have to be implemented throughout the year. So for the last couple of years I have been summarizing the tax year changes at the beginning of the year to have an idea for where I can make changes to cut my tax liabilities.
A lot of Bush Tax cut provisions expired this year and there are a whole host of changes included in the American Taxpayer Relief Act of 2012 that was passed on January 1, 2013. Here is a list of 2013 tax deductions, exemptions and changes that will affect all tax payers.
(Standard Disclaimer: I am not a tax professional and I am not qualified to give tax advice. This post is based on what I understand. Please consult a tax professional if you have any questions.)
Payroll tax: The first and foremost change (and a big one too) is the expiry of the payroll tax cut. Almost everyone would have seen a decrease of 2% in their paycheck. Related to the payroll tax, the maximum taxable earnings for Social Security was increased in 2013 to $113,700 from $110,100 in 2012.
2013 Individual Income Tax Rates
Tax brackets for 2013: The top tax bracket has been increased from 35% from 2012 to 39.6%.
|Tax rate||Single filers||Married filing jointly||Married filing separately||Head of household|
|10%||Up to $8,925||Up to $17,850||Up to $8,925||Up to $12,750|
|15%||$8,926 – $36,250||$17,851 – $72,500||$8,926- $36,250||$12,751 – $48,600|
|25%||$36,251 – $87,850||$72,501 – $146,400||$36,251 – $73,200||$48,601 – $125,450|
|28%||$87,851 – $183,250||$146,401 – $223,050||$73,201 – $111,525||$125,451 – $203,150|
|33%||$183,251 – $398,350||$223,051 – $398,350||$111,526 – $199,175||$203,151 – $398,350|
|35%||$398,351 – $400,000||$398,351 – $450,000||$199,176 – $225,000||$398,351 – $425,000|
|39.6%||$400,001 or more||$450,001 or more||$225,001 or more||$425,001 or more|
2013 retirement (traditional IRA, Roth IRA, 401k, 403b, 457b) contribution limits
Individual retirement plans and 401k contribution limits for 2013:
|Retirement Plan||Contribution Limit||Catch up contribution (Above 50 yrs)|
2013 Traditional IRA AGI Deduction Limits (If Covered by a Retirement Plan at Work)
|Filing Status||Full Deduction||Phase Out||No Deduction|
|Single, head of household||$59,000||$59,000 to less than $69,000||$69,000 or more|
|Qualified Widow(er)||$95,000||$95,000 to less than $115,000||$115,000 or more|
|Married filing jointly||$95,000||$95,000 to less than $115,000||$69,000 or more|
|Married filing separately||Less than $10,000||$10,000 or more|
2013 Traditional IRA AGI Deduction Limits (If NOT Covered by a Retirement Plan at Work)
|Filing Status||Full Deduction||Phase-Out (reduced amount)||No Deduction|
|Single, head of household or qualifying widow(er)||No limit|
|Married filing jointly or separately with a spouse who is not covered by a plan at work||No limit|
|Married filing jointly with a spouse who is covered by a plan at work||$178,000||$178,000 to less than $188,000||$188,000 or more|
|Married filing separately with a spouse who is covered by a plan at work||Less than $10,000||$10,000 or more|
2013 ROTH IRA Income Limits
|Filing Status||Full Deduction||Phase-Out (reduced amount)||No Deduction|
|Single, head of household & Married filing separately (If you did not live with your spouse at any time during the year)||$112,000||$112,000 to less than $127,000||$127,000 or more|
|Married filing jointly||$178,000 or less||$178,000 to less than $188,000||$188,000 or more|
|Married filing separately (and you lived with your spouse at any time during the year)||Less than $10,000||$10,000 or more|
2013 Investment tax (Capital Gains and Dividends)
Capital gains and qualified dividend rates: This is one of the Bush Tax cut provisions that expired in 2013. For 2012, the long term capital gains rate and qualified dividends rate was 0% for everyone in the 15% and lower tax bracket; 15% for everyone above the 15% tax bracket. In 2013, a new 20% rate was introduced for high earners earning more than $400,000 ($450,000 if married).
Head of Household
|0%||Up to $36,250||Up to $72,850||Up to $48,600|
|15%||$36,250 to $400k||$72,850 to $450k||$48,600 to $425k|
|20%||Over $400k||Over $450k||Over $425k|
Net investment income tax: To help fund Medicare, everyone earning over $200,000 (or if married filing jointly, over $250,000) will pay an additional 3.8% on net investment income. This is in addition to the capital gains and dividend tax. Net investment income include gains on sale of stock, mutual funds & bonds, capital gains distribution from mutual funds and gains from sale of investment real estate.
Additional Medicare tax: High income earners (salaried and/or self-employed) will pay an addition 0.9% (on top of the flat 2.9% and the net investment income tax) in Medicare tax. High income is defined as above $200,000 for single filers, above $250,000 for married filing jointly and above $125,000 for married filing separately.
Alternate minimum tax: Alternate minimum tax (AMT) is a game the Government used to play every year. For the last 40 years this tax has been patched every year. Finally, the new American Tax Relief Act of 2012 permanently adjusts AMT to inflation. The AMT thresholds for 2013 are $80,800 for married taxpayers filing jointly; $51,900 for individual taxpayers; and $40,400 for married taxpayers filing separately.
2013 tax deductions & exemption
Standard Deduction for 2013: The individual standard deduction has been raised to $6,100 from $5,950.
- $6,100 for unmarried taxpayers or married taxpayers filing separately
- $12,200 for married taxpayers filing jointly
- $8,950 for taxpayers filing as head of household.
Itemized deductions: The phase out for itemized deductions is back. The limitations kick in at $300,000 for married taxpayers filing jointly, $275,000 for head of household, $250,000 for single taxpayers and $150,000 in the case of a married individual filing separately.
Personal Exemption for 2013: The personal exemption amount will be $3,900 ($100 increase from the 2012 amount of $3,800). However the major change in personal exemption comes from the phasing out. In 2012, there was no phasing out of personal exemption regardless of income. This provision was not extended for 2013. So beginning in 2013, the exemption is subject to a phase-out for individuals having adjusted gross income of $150,000 and married couples filing jointly with adjusted gross income of $300,000. It phases out completely at $211,250 ($422,500 for married couples filing jointly.)
Deduction of state and local sales tax: For 2013 tax year, you can deduct state and local sales tax instead of the state and local income tax. Right now, this deduction is retroactively enacted for 2012 and extended for 2013.
Deduction of private mortgage insurance premiums: You can deduct the homeowner’s private mortgage insurance premium for 2013. This deduction phases out for single & married filing jointly for income more than $100,000.
For a comprehensive list of deductions that are easy to miss, check out this post – Tax deduction checklist - easy to overlook tax deductions.
2013 Estate & Gift Tax limits
Estate tax: The top estate tax rate on the largest estate has been increased from 35% to 40%. Estates valued up to $5,250,000 ($10,500,000 for couples) will be excluded from estate tax.
Portability of unused exemption: Unused exemption of a deceased spouse will transfer over to the surviving spouse.
Gift tax limit: The annual exclusion for gifts rises to $14,000 per person ($28,000 per couple) for 2013, up from $13,000 per person ($26,000 per couple) for 2012.
2013 Education tax incentives
Educator expense deduction: Elementary and Secondary school teachers can take up to $250 above the line deductions for professional expenses incurred, like books, office supplies, computer, etc. This deduction was restored for 2012 and extended for 2013.
Coverdell education savings accounts (ESAs): Modifications to Coverdell education savings accounts (ESAs) enacted in 2001 and 2003 were made permanent in the fiscal cliff deal. The annual contribution limit is $2,000 and the money can be used to pay for elementary, secondary school expenses as well as higher education. The contribution limits phases out with modified adjusted gross income between $190,000 and $220,000.
Employer provided education assistance exclusion extended: Up to $5,250 provided by the employer as part of the education assistance program is exempt from income and employment taxes.
American opportunity tax credit (AOTC): The American opportunity tax credit (formerly Hope credit) of up to $2,500 of the cost of qualified tuition and related expenses including course material, set to expire in 2012 is extended until 2017. This credit is 40% refundable, which means you can receive up to $1,000 even if you owe no taxes.
2013 family tax credits
Adoption credit: The maximum credit for 2013 is $12,970. The credit phases out with modified adjusted gross income between $194,580 and $234,580.
Child care credit: The child care credit is extended for 5 more years until 2017. The limit for this credit remains at $1,000. More information: Publication 972 (pdf).
Child & Dependent Care Tax Credit will be permanently extended. Working parents will continue to receive 35% of the child care expenses up to $3,000 per child or $6,000 per family.
Earned income tax credit (EITC): This credit is extended for another 5 years (till 2017) as well. The 2013 limits are as follows – $6,044 with three or more qualifying children; $5,372 with two qualifying children; $3,250 with one qualifying child and $487 with no qualifying children.
2013 Energy credits and tax incentives
The tax credits for energy efficient home improvements have been around for quite a while now but most of them expired at the end of 2011. The fiscal cliff deal has breathed new life into some of these energy credits and tax incentives. You can claim the tax credits for 2012 and 2013.
The complete list of 2013 energy tax credits is detailed in this post – 2013 Energy tax credits.
Other noteworthy 2013 tax deductions, news or credits
Tax free IRA distributions for charitable purposes (expiring for the 2012 tax year): Individuals can make tax free distributions to charity up to $100,000 per taxpayer directly from their Individual Retirement Accounts (IRA).
Mass transit & parking benefits: The employer provided transit, parking and vanpool benefit is excluded from income tax up to a limit. The limits for the 2013 tax year (which can also be used retroactively back to Jan 1, 2012 if the employer chooses so) are: $245 per employee per month for public transportation OR qualified parking, $490 per month per employee for both public transportation AND qualified parking.
Long-term unemployment benefits are extended for one year.
Whew! That was a long post. This is a summary of the American Tax Relief Action 2012 and the new changes for 2013 as I understand it. Let me know if you see any errors or ambiguities.