What’s New In Taxes

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

Tax season is way in the rearview mirror for most New Yorkers, and now it’s time to prepare for next year. Let’s look at what’s new in taxes so there’ll be as few surprises as possible around the bend.

Bar Codes To Replace SSNs On Most IRS Notices

The IRS is in the process of replacing Social Security numbers with two-dimensional bar codes on nearly all of its notices in an effort to address the growing identity theft problem.

Do You Have An Employer Identification Number?

In January and February of 2014, if you have an employer identification number for your business, trust, or estate, you will receive a new form to verify the information. This is necessary to prevent delays in resolving tax matters, and to correct any information in the IRS files.

New Home Office Deduction Computation For 2013

Regular Method: Under this method, you determine the actual expenses of your home office, including mortgage interest, insurance, utilities, repairs, and depreciation. You then compare the square footage of your home office to the entire home. And voila – your deduction.

The New Simplified Method: Under this new (and improved?) method, you determine the square footage of your home office, and multiply by $5. That’s it. No record keeping, no depreciation add-back when you see your house. And, as a bonus, the IRS says you can deduct your full mortgage interest and real estate taxes on your itemized schedule (Sch. A) — no percentage allowance as under the regular method. And one more thing — you can switch between the two methods from one year to the next. The only restriction is that this new method can only be used on current (with extension) returns.

The Energy Credit – 2013

This 2013 energy credit is actually a continuation of that which was allowed beginning in 2006, with some modification. There is a $500 “lifetime” limit. If you claimed a total of $300 on your 2006 through 2012 returns, the most you can claim in 2013 is $200.

The credit is available for:

• Biomass Stoves
• Heating Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)
• Insulation
• Roofs (Metal and Asphalt)
• Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)
• Windows and Doors

Do you qualify? Check it out on the EnergyStar.gov website

Gift Tax

The annual exclusion for 2013 has been increased from $13,000 to $14,000. This is the amount that may be given to each of any number of recipients (like your tax preparer) with no tax consequences.

Estate Tax

The estate, gift and generation skipping transfer tax has been permanently set at a top rate of 40 percent with a $5.25 million exemption for total lifetime gifts or for estates of decedents dying in 2013. Note: This is for federal purposes only; the states have their own thresholds.

New Medicare Tax On Earnings

Starting in 2013, an additional 0.9 percent Medicare tax is being applied to wages and self-employment income for those whose earnings exceed certain thresholds:

• For single taxpayers, the tax applies to wages and self-employment income that exceed $200,000.
• For married taxpayers filing joint returns, the tax applies to wages and self-employment income on joint income exceeding $250,000.

Employers might not withhold this new tax if your wages do not exceed the threshold. But, if joint wages exceed the threshold, a tax underpayment may result. Consider making estimated tax payments.

New Medicare Tax On Investment Income

In addition, the new 3.8 percent Medicare tax on net investment income will apply. Net investment income includes income from passive activities, so there may be an opportunity to take another look at your businesses and consider their classification, grouping elections, tax basis in these entities, etc., to help minimize this tax.

The application of the new 3.8 percent tax starts at adjusted gross income of:

• $200,000 for single taxpayers
• $250,000 for married taxpayers filing jointly

Consequently, for these higher-income individuals, a combined top tax of 23.8 percent on dividends and long-term capital gains can apply.

Tax Rate Increase on Dividend Income And Long-Term Capital Gains

Beginning in 2013, the top rate on dividend income and long-term capital gains has increased from 15 percent to 20 percent for taxable income in excess of:

• $400,000 for single taxpayers
• $450,000 for married taxpayers filing jointly

Tax Planning

Reduce long-term capital gain income by selling capital loss investments to offset the capital gain. This will result in a lower overall gain subject to tax.

Note: For taxpayers with taxable income (including capital gain and dividend income) of up to $72,500, the capital gain and dividend income is taxed at a zero percent rate. In addition, the 15 percent rate applies at lower levels of taxable income.

Strategy: Shift income or deductions between years. In addition, to reduce this new 3.8 percent tax:

• Invest in tax-free municipal bonds.
• Reduce investment income subject to tax with investment expenses and account maintenance fees.
• Contribute to qualified retirement plans.
• Defer the tax with installment sales and like-kind exchanges.
• Group passive partnership profit-and-loss investments to minimize overall passive income.

Quip: Do you realize that, in about 40 years, we’ll have thousands of old ladies running around with tattoos? And rap music will be the “Golden Oldies.”

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.