Plan Ahead for Next Year’s Tax Day

Posted by Burroughs, Moreland & Mudd

Bay Leader

 

Tax day has come and gone, but next year’s tax season will be here before you know it. Get a jump on planning for next year by taking into account the following changes in the tax law:

Medical Surcharges: Millions of Americans with higher incomes will face higher taxes because of new Medicare surcharges. A surcharge of 0.9 percent will be levied on earnings above $200,000 for single filers and on earnings above $250,000 for joint filers. Separately, a surcharge of 3.8 percent will apply to net investment income for people whose adjusted gross incomes top the $200,000 and $250,000 thresholds.

Medical Expenses: Major medical expenses have been deductible if unreimbursed costs exceed 7.5 percent of adjusted gross income. For most taxpayers, that floor for major medical expenses will rise this year to 10 percent, though for people 65 and over, that change will be delayed until after 2016.

Remember to include medical-related transportation costs. If you drive your own car, mileage for 2012 is deductible at 23 cents a mile, rising to 24 cents this year (unlike driving for charity, deductible at 14 cents a mile for 2012 and 2013, or for business, at 55 cents a mile, rising to 56.5 cents this year). Parking and tolls may also be included.

Home Office Deduction: This tax break is for self-employed people who work from home, regardless of whether that is full-time or sideline work, and for employees whose employers require them to maintain a home office. It has been known as an audit trap, in part because complicated rules have resulted in filing errors; however, for 2013, there is a new option.

The I.R.S. will allow qualified taxpayers to deduct $5 per square foot for home office expenses, up to a maximum of $1,500. In addition, you will be able to deduct 100 percent of the interest on your mortgage and 100 percent of the real estate taxes as itemized deductions on Schedule A.

Two traditional requirements, however, still apply: the home office must be used regularly and exclusively for business and must be necessary for the conduct of the business.

Social Security Tax: Withholding for Social Security has gone back to 6.2 percent this year on earnings up to $113,700. The tax had been shaved by two percentage points the past two years to stimulate the economy. The change could amount to an annual increase of $2,274 for a single person or up to $4,548 for a couple.

Other Changes:

• For taxpayers taking the standard deduction, rather than itemizing deductions, the marriage penalty has been eliminated. The standard deduction for married filers is twice that of single filers, $12,200 versus $6,100.

• The mass transit benefit break, which had been cut to $125 a month after 2011, has been reinstated and extended. Employees can exclude up to $245 a month from gross income for employer-provided mass transit as well as for parking benefits this year. For 2012, $240 was retroactively set as the upper monthly limit for both of those benefits.

• The option for taxpayers who itemize federal deductions to deduct state and local sales taxes rather than state income taxes has been reinstated for this year and made retroactive for 2012. The option may benefit people who live in states without a state income tax, like Texas or South Dakota, or who buy a big-ticket item like a car or yacht.

• The option for taxpayers aged 70 1/2 or older to make tax-free transfers of up to $100,000 from an I.R.A. to a charity has been reinstated for last year and extended for this year. By having the money transferred directly, taxpayers may satisfy the legal requirement for minimum distributions after age 70 1/2 without increasing adjusted gross income and hence taxes.

If you want thorough and professional help getting your taxes filed, contact Burroughs, Moreland & Mudd, CPA of Charlotte Hall, Maryland at 301-884-4641.