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2013 Tax Law Updates

Below is a brief summary of key tax law changes for 2013 federal tax returns. No need to memorize this information,though TaxACTs easy interview will guide you through these and all the other tax law changes. This is for yourinformation only.

Employees

Families

Homeowners

Adjustment for expenses of educators - If youre a teacher or other educator, you can still deduct up to $250in related job expenses as an adjustment to income, even if you dont itemize deductions. Unlike most employeeexpenses, educator expenses are not reduced by 2% of your adjusted gross income.

Social Security wage ceiling - The maximum amount of your earned income on which you pay Social Security taxis now $113,700. When you reach that amount with one employer, they should stop withholding Social Security taxfrom your pay until the following year. If you work for more than one employer, and your total earnings are more than$113,700, TaxACT calculates a credit for any overpayment of Social Security taxes.

Transit and transportation fringe benet- If your employer provides a benet for transit passes and transportationin a commuter highway vehicle (such as a vanpool), your maximum tax-free benet is now $245 per month.

Foreign earned income exclusion - If you qualify, you can exclude up to $97,600 of your foreign earned income fromyour taxable income for 2013. If you and your spouse both work in a foreign country and meet the qualications, youmay each be able to exclude up to $97,600.

Child and Dependent Care Credit amounts- The maximum amount of child and dependent care expenses eligiblefor the credit is now $3,000 if you have one child, or $6,000 if you have two or more children. These increased amountsare permanent.

Child Tax Credit- The credit has been made permanent at $1,000 per child. Without the deal, the credit would havedropped back down to $500 per child.

Adoption Credit- You may qualify for a credit equal to up to $12,970 of your adoption expenses. If your employeprovides adoption benets, you may also be able to exclude up to the same amount from your income. Both a creditand exclusion may be claimed for the same adoption, but not for the same expense. The credit is now permanent andindexed to ination.

Kiddie tax rules - The amount of unearned income certain children can have before they pay tax at their parents rateshas gone up. Children can now have up to $2,000 in unearned income before they are subject to kiddie tax rules.Depending on the childs age and whether he or she is a student, kiddie tax rules may apply to children up to age 23.

No tax on forgiven debt if you lose your home- Forgiven debt is normally taxable income - even if the debt is fromlosing your underwater home by foreclosure or short sale. With the discharge of qualied principal residence exclusionhowever, you generally dont have to pay tax on the dierence between your mortgage balance and the amount ofmoney the bank receives from the sale of the home.

Mortgage insurance premiums- If you pay mortgage insurance premiums, also known as private mortgage insurance(PMI), you may be able to deduct the premiums as mortgage interest.

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Everyone

Education & College

Healthcare

Standard deduction - The standard amount you can deduct from income if you dont itemize your deductions is$6,100 ($12,200 for married couples ling jointly, or $8,950 if you le as head of household).

Personal exemptions- The personal exemption for 2013 is $3,900, up from $3,800. Each exemption for yourself, yourspouse (if you le jointly), and your dependents reduces your taxable income by $3,900.

Marriage penalty relief - This provision increases the standard deduction for married taxpayers ling jointly, andexpands the 15% tax bracket.

Alternative Minimum Tax- The Alternative Minimum Tax (AMT) exemption amount rises in 2013 to $51,900 ($80,800for married couples ling jointly). For married individuals ling separately, the AMT exemption is $40,400.

Earned Income Credit- If you have no children, your maximum Earned Income Credit for 2013 is $487. With twochildren, the maximum amount is $5,372, and with one child, it is $3,250. If you have three or more qualifying childrenthe maximum Credit you can receive for 2013 is $6,044 (up from $5,891 in 2012).

Alternative minimum tax (AMT) relief - The exemption amount for the AMT has been increased regularly by CongressStarting in 2012, AMT exemption amounts are tied to ination so annual patches to the amount will no longer beneeded.

Education savings bond income limits- You may be able to exclude all or part of the interest from qualifying Series EEor Series I bonds if you use the income for qualied educational expenses. You cannot take this benet if your modiedadjusted gross income is than $89,700 or more ($142,050 if you le jointly, or if you le as Qualifying Widow(er) with

Dependent Child).

American Opportunity Tax Credit- The American Opportunity Tax Credit expanded on the Hope Credit. The incomelimits are higher, the credit is available for more qualied expenses, and you can use the credit for four years of postsecondary education instead of just two. In addition, you can even get a refund if you dont owe any tax for up to 40%of the credit ($1,000).

Tuition expense deduction - You can still deduct tuition expenses as an adjustment to income, even if you dontitemize your deductions. You generally take the tuition expense deduction if you dont qualify for an education credit oother tax break for the same expenses.

Coverdell Education Savings Accounts increased limit- The new, permanent contribution limit is $2,000 per year.

The Aordable Care Act, also known as Obamacare - The healthcare-related tax law changes vary in range andscope, and will be implemented over the next several years. Changes include an increased threshold for medicaldeductions (see below), reporting health insurance on Form W-2s, a tax penalty for being uninsured and a premiumtax credit for coverage purchased through Health Insurance Marketplaces. The majority of taxpayers will see minimaimpact on their 2013 federal taxes.

TaxACT will help you easily navigate the changes each year. For more information, visit TaxACTs website,HealthcareACT.com. The site oers tools and information to help you understand the impact of the Aordable CareAct on your taxes. Resources include year-by-year guidance and calculators to estimate your eligibility for the premiumtax credit or your tax penalty for being uninsured. Although the penalty and credit will not aect 2013 tax returns, theinformation may help you now when making decisions about health insurance for the 2014 calendar year.

Increased oor for medical expense deductions- Its harder to take a medical expense deduction in 2013. You can

now only deduct medical expenses for you, your spouse, and your dependents to the extent that your total medicalexpenses exceed 10% of your adjusted gross income. If your adjusted gross income is $50,000, for example, you canonly deduct medical expenses that exceed $5,000 ($50,000 X 10% = $5,000).

If you are age 65 or older, you can still deduct total medical expenses that exceed 7.5% of your adjusted gross incomeFor example, if your adjusted gross income is $50,000, you can only deduct medical expenses that exceed $3,750($50,000 X 7.5% = $3,750). This is true for both you and your spouse, as long as one of you is over age 65.

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High-Income HouseholdsAdditional Medicare Tax on wages and compensation- If you earn more than $200,000 in wages, compensationand self-employment income, you must pay the Additional Medicare Tax of 0.9% on your earnings over the limit. Ifyou le jointly, you and your spouse can earn a total of $250,000 before you pay this tax. If you are married and lingseparately, the Additional Medicare Tax applies to your earned income over $125,000.

Your employer withholds the Additional Medicare Tax from your pay. If you earn more than $200,000 from oneemployer, they deduct an additional 0.9% tax on your wages over $200,000.

The amount of additional Medicare tax your employer withholds may often be more or less than the amount you oweFor example, if you work for more than one employer and you earn less than $200,000 from each of them, neitheremployer withholds the additional tax. In that case, you pay the Additional Medicare Tax in addition to your other taxliability.

You cannot claim exemption from having the Additional Medicare Tax withheld from your pay. You can adjust yourother income tax withholding if you expect your total tax, including the additional tax, to be more or less than theamount your employer withholds.

Your employer reports the additional 0.9% tax withheld from your pay on Form W-2. You enter this information inTaxACT, and the program reconciles the amount your employer withheld and the amount you actually owe on your taxreturn.

If you are self-employed, you should include the additional 0.9% in your estimated tax payments to avoid owing penalties

and interest when you le.Additional 3.8% tax on net investment income - This new tax applies to investment income, such as interestdividends, capital gains, rental and royalty income.

The 3.8% tax is in addition to the tax you already pay on investment income. If you pay 20% tax on a long-term capitagain, your total tax on the gain is 23.8% (20% + 3.8%).

You only pay this tax if your modied adjusted gross income is $200,000 or more ($250,000 if ling jointly, or $125,000if married ling separately). Your investment income is reduced by expenses that you can allocate to your investmentincome, including investment interest expense, advisory and brokerage fees, and rental and royalty expenses. It is alsoreduced by state and local income taxes that you can allocate to investment income items.

If youre a nonresident alien, you are not subject to the additional 3.8% tax.

New, higher income tax rate- If your taxable income is more than $400,000 ($450,000 if you le jointly, $425,000 ifhead of household, or $225,000 if married ling separately), your new tax bracket is 39.6% - up from 35%. This is themarginal rate - the rate you pay on your taxable income over these limits.

Higher capital gains tax rate- If youre in the new, higher income tax bracket, your new tax rate on capital gains anddividends is 20% - up from 15%.

Limitation on itemized deductions- If you have a high adjusted gross income, you may not be able to take all youritemized deductions, thanks to the Pease provision. Itemized deductions start to phase out at $250,000 ($300,000 ifling jointly, $275,000 if head of household, or $150,000 if you are married ling separately). Your itemized deductionsare reduced by 3% of your adjusted gross income over these amounts, but they are never reduced by more than 80%of your otherwise allowable deductions.

Personal exemption phaseout (PEP) - Your personal exemptions for yourself, your spouse, and your dependentsreduce your taxable income by $3,900 each. If your adjusted gross income is over $250,000 ($300,000 if ling jointly$275,000 for head of household, or $150,000 if you are married ling separately), your personal exemptions arereduced by 2% for each $2,500 or portion over these amounts.

Death tax rate increase- For persons who died in 2013, the federal estate tax rate rises from 35% to 40%. This taxonly applies to estates larger than $5,250,000 - up from $5,120,000 in 2012.

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MiscellaneousStandard mileage rates- The standard mileage rates for the use of your car or other vehicle is 56.5 cents per mile fobusiness, 24 cents per mile driven for medical or moving purposes, and 14 cents per mile for charitable travel.

State and local sales tax deduction- For 2013, you can still deduct state and local sales taxes. You can take thisdeduction or a deduction for state income tax - but not both.

Legal same-sex marriages recognized by the IRS.Starting with the 2013 tax year, if you are in a legal same-sexmarriage, you are married for federal tax purposes and must le a joint or separate return. You cannot use the Singleling status.

You are in a legal marriage if you were legally married in a state that recognizes same-sex marriages. Registereddomestic partnerships and civil unions do not qualify. Once you are legally married, it does not matter for federal taxpurposes if you move to another state.

If you were in a same-sex marriage in prior years, you may be able to le an amended federal tax return for 2010, 2011and 2012. You are not required to le an amended return.

Contribution limits for exible spending accounts - The most you can contribute to one of these plans is now$2,500. Your spouse can also contribute $2,500 if he or she meets the qualications.

IRA-to-charity exclusion - The IRA qualied charitable distribution (QCD) provision has been extended. If you areage 70 or older, this exclusion allows you to make direct distributions from your traditional IRA to a charity withoutrecognizing the distribution as income. (You cannot take a charitable deduction.)