5 Changes to the Tax Code to Keep in Mind When Filing
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At over 4 million words and an edit rate of more than once per day, the U.S. tax code is a constantly evolving labyrinth of exceptions, special conditions, and byzantine bureaucracy that (let’s face it) most people don’t understand. Americans spend an estimated 6 billion hours each year doing taxes or jumping through tax-related hoops — that’s nearly 25 hours for every person above the age of 18. We imagine most of it is spent finding creative ways to curse the Internal Revenue Service, creating voodoo dolls of Uncle Sam, or simply staring at the wall in a defeated, mind-numbing rage.
If you’re like most Americans, though, you just bite the bullet, hire a professional, and wipe your hands of the whole mess. According to a report from Nina Olsen, the National Taxpayer Advocate, 60 percent of Americans hire a professional to shoulder the soul-crushing burden of tax preparation. This is great, if you can afford it. What’s 25 hours of your time worth?
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For those who can’t or don’t want to use professional assistance, there are really just two roads to follow. Either you resign yourself to your fate and, like 10 percent of Americans, file your taxes without any assistance — or you use commercial software that can help expedite the process. Whatever road you take, though, it helps to have a certain level of background knowledge about the tax code. In particular, it helps to know which taxes or deductions (especially those that apply to you) are changing. Here are some tax changes that took effect in 2013 that apply to many Americans, courtesy of the IRS.
1. Additional Medicare Tax
You are probably already familiar with the Medicare tax. Historically, Uncle Sam has charged a 2.9 percent tax to fund the healthcare service that was flat across all income levels. Half of it, 1.45 percent, is withheld from your paycheck, while the other half is paid by your employer. Those of you who are self employed know that you have to shoulder the whole 2.9 percent yourself.
Beginning in 2013, though, the government is charging an additional 0.9 percent for Medicare on Americans with incomes above a certain threshold. The new rate of 3.8 percent will apply to incomes of more than $125,000 for married single filers, $250,000 for married joint filers, and $200,000 for all other filers.
2. Capital gains and dividends
This is one of the more straightforward changes that happened in 2013. If you are a single filer earning for than $400,000 or a couple earning more than $450,000, your capital gain and dividend tax rate will increase from 15 percent to 20 percent. This doesn’t apply to the vast majority of Americans. People in the lowest two income tax brackets — below $36,250 for a single filer and $72,500 filing jointly — will pay no taxes on investment income, and most everybody else will pay 15 percent.
3. Net investment income tax
According to Pew Research, less than half of Americans are invested in the stock market. If you’re a member of this fortunate minority, the past few years have been good to you — really good. The S&P 500 is up over 116 percent over the past five-year period, making this past half decade one of the most profitable for America’s investment class in history.
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Not to rain on the parade of paper money, but the rewards reaped from these investments, such as dividends, by wealthier Americans were subject to a new taxes, also aimed at funding Medicare. This is one of the more annoying taxes because it has a few layers of complication to it. For one, the tax is applied to the lower of your net investment income, or your modified adjusted gross income of more than $125,000 for married single filers, $250,000 for married joint filers, and $200,000 for all other filers.
The net investment income tax scrapes an additional 3.8 percent off whichever of these is lower. You’re a married single filer with a modified adjusted gross income of $150,000, and $10,000 in net investment income? You’re paying it on the $10,000, not the $25,000.
4. Personal exception
The tax code may be packed full of unfair exemptions and loopholes for certain businesses and the super wealthy, but the average Joe has at least one thing going for him: the personal exemption. The personal exemption acts like a tax deduction, meaning it reduces your total taxable income. It is regularly adjusted upwards, and 2013 was no exception. The personal exception increased by $100 — to $3,900 — so make sure you take every dollar you can get when you file in April.
5. New tax brackets
There’s a certain alchemy to taxes, but really the biggest hit that most individuals receive is from the personal income tax. This is also where the government makes most of its money, collecting about 60 percent of total revenue from the personal income tax. Since it’s probably your biggest tax liability, it’s worth knowing which tax bracket you fall into. Remember that 2013 saw the addition of a new top tax bracket.
Tax rate | 2012 Single Filer | 2012 Joint Filer | 2013 Single Filer | 2013 Joint Filer |
10% | Up to $8,700 | Up to $17,400 | Up to $8,925 | Up to $17,850 |
15% | $8,701 – $35,350 | $17,401 – $70-700 | $8,926 – $36,250 | $17,851 – $72,500 |
25% | $35,351 – $85,650 | $70,701 – $142,700 | $36,251 – $87,850 | $72,501 – $146,400 |
28% | $85,651 – $178,650 | $142,701 – $217,450 | $87,851 – $183,250 | $146,401 – $223,050 |
33% | $178,651 – $388,350 | $217,451 – $388,350 | $186,251 – $398,350 | $223,051 – $398,350 |
35% | $388,451 or more | $388,351 or more | $398,341 – $400,000 | $398,341 – $450,000 |
39.6% | - | - | $400,001 or more | $450,001 or more |
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