Saturday, February 8, 2014

Tax Season 2014 - Get Ready for the Ouch! by Guest Blogger Sherri Mahoney-Battles

Tax season 2014 is right around the corner, and a host of tax changes that become effective this year will be particularly painful for taxpayers in a higher tax bracket. A former 39.6 percent bracket has been reinstated for taxpayers with higher taxable incomes. For 2013, the 39.6 percent bracket starts at taxable income levels of $400,000 for single and $450,000 for married couples. This newly reinstated tax rate is now permanent until Congress changes it.

Capital gains rates of 0 and 15 percent are now permanent, but a new 20 percent rate applies for taxpayers with higher taxable income. This 20 percent rate applies to taxpayers with long-term capital gains that fall into the above-mentioned 39.6 percent tax bracket.

Beginning in 2013, medical expenses will need to exceed 10 percent of the taxpayer’s adjusted gross income (previously 7.5 percent) in order to be deductible. Taxpayers over sixty five, however, will be able to deduct medical expenses that exceed 7.5 percent of adjusted gross income for taxable years 2013-2016. An additional 2013 change to itemized deductions is a phase-out of itemized deductions for higher income taxpayers. The phase-out level is $250,000 for single and $300,000 for joint filers.

Two new and potentially painful taxes will also rear their heads this year. The 3.8% Net Investment Income Tax (NIIT) tax went into effect January 1, 2013. Taxpayers with incomes over $200,000 for individuals or $250,000 for married couples will be paying an additional 3.8% tax on income from interest, dividends, annuities, royalties and rents. Capital gains on a primary home sale that exceed $250,000 for individuals or $500,000 for a married couple, meeting the income threshold, will face the 3.8% tax realized on the excess gain. Although this tax is aimed towards higher income taxpayers, it can include anyone who has a big one-time shot of investment income or gain. Also, beginning in 2013 is an additional .9 percent Medicare Tax assessed on individuals with wages or self-employment earnings that exceed $200,000.

All of these changes are part of the American Taxpayers Relief Act of 2012 and the Affordable Care Act and are geared towards generating additional tax from higher income taxpayers. Some taxpayers will be surprised to find themselves in this situation and many will feel the impact of not just one hit but multiple hits coming from different areas. For example, taxpayers in the higher 39.6 percent tax bracket will have additional federal income tax, a higher capital gains rate, lower itemized deductions, an additional .9 percent Medicare Tax and an additional 3.8% investment tax. Unfortunately, many of these people will also be paying tax on 85 percent of their social security benefits as well. Just a few weeks ago I did a tax planner for a couple and these tax hikes added a whopping $18,000 to an already steep tax bill.

Now more than ever, a proactive approach to tax planning and strategizing is necessary. Armed with the above information taxpayers have the ability and should strategically plan asset sales and expenses like medical payments so that they can take advantage of tax bracket changes and phase outs. Higher taxes for taxpayers with income in these ranges may be inevitable, but taxpayers who plan strategically can act accordingly and potentially reduce their tax liability.

Sherri Mahoney-Battles, Enrolled Agent

For more information about how Sherri can help you to navigate these taxing matters visit her website at

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