Major Changes of 2013

When all the dust finally settled, Congress backed off the fiscal cliff temporarily with the passage of massive tax changes for 2013. These changes will now be reflected as you file this year’s tax return. Here are five things that you need to be prepared to notice.

Self-employment FICA. Wage earners have already felt the impact of the social security tax rate reset to the traditional 6.2% (temporary rate in 2012: 4.2%). However, self-employed workers may feel this impact when filing your annual tax return.

Dividends and Long-term Capital Gains. While qualified dividends will not be taxed as ordinary income, the maximum tax rate goes up 33% (from 15% to 20%). The maximum tax rate on long-term gains also goes from 15 to 20%.

Higher Taxes. If your income is above $200, single or $250,000 married filing jointly, your taxes will be going up. In some cases it may be up dramatically. Why? Your tax return may be subject to the following increases; a new 39.6% tax rate, itemized deduction phase-out, exemption phase-out, increase in long-term capital gains taxes, and more.

Medicare Surtax. To help pay for new health care initiatives, 2013 marks the first year of Medicare surtaxes for those whose incomes surpass $200,000 single or $250,000 joint. The extra tax may have been applied to your paycheck, but because of the marriage penalty in this part of the code, you may be subject to the additional tax when your income is combined with your spouse’s income at tax filing time.

10% Medical Expense Threshold is Upon Us. For those under the age of 65, the medical expense threshold is now 10% of your Adjusted Gross Income (AGI). You may only deduct qualified medical expenses that exceed this percentage of your AGI. The threshold remains 7.5% if you are 65 years old or older.