Tax Law Changes

  • Tax Provisions Set to Expire in 2013 

    Unless extended by Congress, the tax stipulations listed below were due to expire on December 31, 2013. Some of these tax breaks have been extended in previous years, so it’s feasible to think Congress might extend them again. But when Congress chooses to act on these tax issues is the unknown.    

    • Individuals can elect to deduct (as long as they itemize) state and local sales tax instead of state and local income taxes, whichever is the greater amount. People living in a state with little or no state income tax can benefit from this deduction. Taxpayers who have purchased a big ticket item, like a car, can also benefit from this option – but may not after 2013. 
    • Taxpayers who added energy-saving home improvements to their primary residence in 2013 may be the last to benefit from this tax credit. The Nonbusiness Energy Property Tax Credit (with a lifetime limit of $500) was set to expire in 2011 but got extended through 2013. Homeowners need to double check that the improvements qualify as energy-efficient (the manufacturer should be able to confirm this). 
    • Grade K- 12 teachers, instructors, counselors, principals and aides who qualify can get an above-the-line deduction of up to $250 out-of-pocket costs for school and classroom supplies.  
    • The Tuition and Fees Deduction allowed taxpayers to deduct up to $4,000 of qualified tuition costs – and expired at year end. The American Opportunity and Lifetime Learning credits remain in effect. 
    • A tax credit for highway-capable 2- or 3-wheeled electric vehicles (not low speed such as golf carts) expired at year-end. The tax credit of $7,500 available for 4-wheeled electric vehicles will be phased out once the manufacturer has sold 200,000 vehicles. 
    • Mortgage Insurance Premium Deduction, which allows taxpayers to treat qualified mortgage insurance premiums as an additional, itemized mortgage interest deduction, was scheduled to sunset at the end of 2013. 
    • Taxpayers older than age 70½ are required to take minimum distributions from their individual retirement accounts, so the IRA distribution to charity allows them to contribute that money without counting those distributions as income. Charitable contributions of these IRA distributions expired at the end of 2013. 

    Here is a short list of more tax provisions that were scheduled to expire at the end of 2013:  

    • Transportation benefits being equal for tax-free transit passes and qualified parking 
    • 2- or 3-wheeled highway capable electric vehicle credit 
    • Alternative fuel credit 
    • Work opportunity credit  
    • Employer wage credit for employees who are active duty members  
    • Indian employment credit  
    • Indian reservation property accelerated depreciation recovery periods 
    • Treatment of certain real property as section 179 property  
    • 50% bonus depreciation (tax year 2013 only)  
    • Leasehold improvements, restaurant buildings and improvements, and retail improvements eligible for Section 170 deduction 
    • Enhanced charitable deduction for contributions of food inventory  
    • Qualified zone academy bonds  
    • Gains on section 1202 small business stock exclusion increased to 100%  
    • Computer Software eligible under Section 179  
    • S corporation’s recognition period for built-in gains tax reduced from 10 years to 5   
    • Increased section 179 expensing limits: $500,000 limit with a $2,000,000 phase-out  
    • Domestic production activities deduction for activities in Puerto Rico (tax year 2006 through tax year 2013)   

    Consult a tax professional on the expiring tax regulations, as some may be extended and may even be claimed retroactively once Congress rules on this legislation. Call 1-866-871-1040 or use the office locator to find your nearest Liberty Tax office.


    New Tax Laws for 2013 

    Considering all the media attention around the Affordable Care Act and the Health Insurance Exchange Marketplace’s slow launch, some new tax laws didn’t get as much media coverage as they might have deserved. Liberty Tax turns the spotlight to the new tax laws for 2013, keeping taxpayers informed and educated on issues that affect them the most.   

    Legally married same-sex couples will be treated like married couples on federal taxes.

    The Internal Revenue Service and the U.S. Department of Treasury announced in August 2013 that they will treat same-sex couples, legally married in jurisdictions that recognize their marriages, as married for federal tax purposes. Effective September 16, 2013, the ruling stands even for those couples who do not reside in the jurisdiction where they were married.  

    Those in same-sex marriages could possibly benefit from amending their federal tax return for the past three years. Same-sex couples who were legally married in a prior tax year, regardless of where they were married, will qualify for federal amendments. Under the ruling, all federal tax provisions that pertain to marriage are affected, including a couple’s filing status, employee benefits, claiming the earned income tax credit, certain deductions and the child tax credit. However, filing an amendment could cost a couple more, so visiting a tax preparer is the best course of action.     

    Capped at $2,500, flexible spending accounts can have funds carried over to the next year.

    In October 2013, the IRS announced that employers can adjust the “use-it-or-lose-it” rule for flexible spending account (FSA) funds, meaning employers can opt to let employees roll over $500 worth of unused funds to the following year. The “use-it-or-lose-it” rule has left employees trying to calculate medical expenses accurately or lose them at the end of the year. This new notice may make an FSA more appealing for taxpayers who didn’t want to take advantage of an FSA for fear of a miscalculation.

    In 2005, the rule was changed to allow employers to offer a ‘grace period.’ Employees got two and a half months to use their FSA funds before losing them. Now, employers can offer a $500 roll over or a grace period, but not both. The flexible spending account is a popular workplace benefit that’s now more flexible. 

    Higher income earners have seen their tax bracket increase to 39.6%.

    For high income earners, tax year 2013 saw a significant change. The highest federal tax bracket is now 39.6%. This increase applies to taxpayers with taxable income over $400,000 if single; $450,000 if married filing jointly; $225,000 if married filing separately; and, $425,000 head of household.  

    Another important fact to consider while tax planning: Taxpayers in that top tax bracket of 39.6% will pay a new higher 20% tax rate on long-term capital gains and qualified dividends. 

    There are two new Medicare taxes, due to Affordable Care Act (Obamacare).

    The Affordable Care Act (ACA) introduced a few tax changes on its own; one known as the Medicare Payroll Tax. Taxpayers earning over $200,000 if single or over $250,000 married filing jointly will be subject to a new 0.9% Medicare payroll tax over the threshold amount. Many taxpayers have already noticed this tax being withheld once their earnings reached $200.000 (no matter what their filing status). It is important to talk with a tax preparer because an employer does not consider filing status, which does make a difference on whether or not the taxpayer qualifies for the tax. For example, the employer starts deducting the Medicare payroll tax of an employee’s earnings at the $200,000 mark regardless of whether the employee submits a married filing jointly return. 

    However, if that employee’s spouse doesn’t work and the couple files jointly with a taxable income of $240,000 – they paid Medicare tax when they didn’t meet the threshold and the tax will be refunded.  

    The other Medicare tax is the new 3.8% Medicare contribution tax which is applied on a taxpayer’s net investment income for those whose AGI exceeds $200,000 if single and $250,000 if married filing jointly ($125,000 for married filing separately). 

    Liberty Tax wants to stress to taxpayers to learn the tax laws and seek professional assistance if they are uncertain or unclear about any tax issue. Learn more about how Obamacare will impact you by visiting our Affordable Care Act website. Refer to our Tax Glossary for a complete list of definitions and explanations of commonly used tax terms.