New top tax rate among 2014 changes to watch for

I had a better year income-wise than I expected. How will the new tax law impact me?

With another year behind us, many may be surprised by the ramifications of the enactment of the American Taxpayer Relief Act of 2012 on their specific situation. As you start to prepare paperwork for your accountant, be aware of the changes relative to your 2013 tax return, which has a filing deadline of April 15, 2014.

Increase in top tax rate. Beginning with this year’s tax return, a new top rate of 39.6% took effect. This rate applies to taxable income in excess of $450,000 (joint returns and surviving spouses), $425,000 (heads of household), $400,000 (unmarried other than head of household and surviving spouse), and $225,000 (married filing separately).

Increased tax rate on certain capital gains and dividends. While the favorable tax rates in effect before 2013 for capital gains and dividend income were generally made permanent by the American Taxpayer Relief Act of 2012, a new 20% rate applies to amounts that would otherwise be taxed at the 39.6% rate. Thus, tax rates of 0%, 15%, and 20% apply to capital gain and dividend income, depending on your tax bracket. These rates apply for alternative minimum tax purposes also.

New taxes effective this year. There are a couple of new taxes that will be effective this year: a 3.8% tax on net investment income above a threshold amount and a .9% additional tax on wages and self-employment income above a threshold amount. For both taxes, the threshold amount is $200,000 ($250,000 if married filing jointly or $125,000 for married filing separately). Income taken into consideration in calculating net investment income includes most rental income and net gain attributable to the disposition of property other than property held in trade or business.

Increased threshold for deducting medical expenses. Medical and dental expenses that exceed a certain percentage of your adjusted gross income for the year are deductible. For years prior to 2013, that percentage was 7.5%. For 2013 and later years, the deduction floor is increased to 10%.

Reduction in personal exemptions and itemized deductions for high-income taxpayers. There is a reduction in personal exemptions and itemized deductions for taxpayers with adjusted gross income over $250,000 (unmarried other than head of household and surviving spouse), $300,000 (joint returns), $275,000 (head of household), and $150,000 (married filing separately), which will have the effect of increasing taxes on affected taxpayers.

Deduction for eligible teacher expenses. Another provision that expires in tax year 2013 is the deduction for eligible teacher expenses. For tax years beginning before 2014, eligible educators (ie, teachers) can deduct from gross income up to $250 of qualified expenses they paid during the year. If spouses are filing jointly and both were eligible educators, the maximum deduction on the joint return is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses.

Student loan interest deduction. If you had any student loans during the year and your modified adjusted gross income (MAGI) is within certain limits, you may deduct up to $2,500 of interest paid on that loan in computing adjusted gross income. For this year, the deductible amount is phased out if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if filing a joint return). You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if filing a joint return). The deduction is not available if your filing status is married filing separately.

Tax planning has always been inherently complex, and the recent laws have made it even more complicated. Unfortunately, higher earning taxpayers who are subject to the changes should prepare themselves for a higher overall income tax liability. Continue to next page for another question and answer.

I just started my residency. Even though I am earning income, are the tax credits for my last year of tuition still available to me?

If you paid any qualified education expenses during the year, you may be eligible for American Opportunity Tax Credit. The maximum credit amount is $2,500 per year for each eligible student. The amount of the credit for each student is calculated as 100% of the first $2,000 of such expenses paid. The credit may be reduced, however, depending on your modified adjusted gross income (MAGI).

For this year, MAGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers) is used to determine whether there is any reduction. If your MAGI is in excess of $80,000 ($160,000 for joint filers), the amount of the credit is phased out. No credit is allowed if your MAGI is $90,000 or more ($180,000 or more for joint filers).UT

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