personal deductions to tax credits and educational expenses,
many of the tax changes affecting individuals were related to
the signing of the American Taxpayer Relief Act (ATRA), which
modified, made permanent, or extended a number of tax
provisions that expired in 2010 and 2011.
With that in mind, here's what individuals and
families need to know about tax changes that took effect in
The personal and dependent exemption for tax year 2013 is
In 2013 the standard deduction for married couples filing a
joint return is $12,200. For singles and married individuals
filing separately, it's $6,100, and for heads of household the
deduction is $8,950.
The additional standard deduction for blind
people and senior citizens increases in 2013 to $1,200 for
married individuals and $1,500 for singles and heads of
Income Tax Rates
Beginning in tax year 2013, a new tax
rate of 39.6 percent has been added for individuals whose
income exceeds $400,000 ($450,000 for married taxpayers
filing a joint return). The other marginal rates--10, 15, 25,
28, 33 and 35 percent--remain the same as in prior years.
Due to inflation, tax-bracket thresholds
increased for every filing status. For example, the
taxable-income threshold separating the 15-percent bracket
from the 25-percent bracket is $72,500 for a married couple
filing a joint return.
Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there
is an exemption of $5.25 million per individual for estate,
gift and generation-skipping taxes, with a top rate of 40%.
The annual exclusion for gifts is $14,000.
Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for
inflation retroactive to 2012. In addition, non-refundable
personal credits can now be used against the AMT. For 2013
exemption amounts are $51,900 for single and head of household
filers, $80,800 for married people filing jointly and for
qualifying widows or widowers, and $40,400 for married people
Marriage Penalty Relief
For 2013, the basic standard deduction for a married couple
filing jointly is $12,200.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal
exemption phase-out) limitations were made permanent by ATRA
and affect taxpayers with income at or above $250,000 (single
filers) and $300,000 for married filing jointly starting with
tax year 2013.
Flexible Spending Accounts (FSA)
Flexible Spending Accounts are limited to $2,500 per year
starting in 2013 (indexed to inflation) and apply only to
salary reduction contributions under a health FSA. The term
"taxable year" as it applies to FSAs refers to the plan year
of the cafeteria plan, which is typically the period during
which salary reduction elections are made.
Specifically, in the case of a plan providing a
grace period (which may be up to two months and 15 days),
unused salary reduction contributions to the health FSA for
plan years beginning in 2012 or later that are carried over
into the grace period for that plan year will not count
against the $2,500 limit for the subsequent plan year.
Further, the IRS is providing relief for
certain salary reduction contributions exceeding the $2,500
limit that are due to a reasonable mistake and not willful
neglect and that are corrected by the employer.
Long Term Capital Gains
In 2013 tax rates on capital gains and dividends for taxpayers
whose income is at or below $400,000 ($450,000 married filing
jointly) remains at 2012 rates. For taxpayers in the lower tax
brackets (10% and 15%), the rate remains at 0%, (the same as
in 2012). For taxpayers in the middle tax brackets however,
the rate increases to 15%. For taxpayers whose income is at or
above $400,000 ($450,000 married filing jointly), the rate for
both capital gains and dividends is capped at 20% (up from 15%
Individuals - Tax Credits
In 2013 a nonrefundable (i.e. only those with a lax liability
will benefit) credit of up to $12,970 is available for
qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The child and dependent care tax credit was permanently
extended for taxable years starting in 2013. If you pay
someone to take care of your dependent (defined as being under
the age of 13 at the end of the tax year or incapable of
self-care) in order to work or look for work, you may qualify
for a credit of up to $1,050 or 35 percent of $3,000 of
For two or more qualifying dependents, you can claim up to 35
percent of $6,000 (or $2,100) of eligible expenses. For higher
income earners the credit percentage is reduced, but not below
20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
For tax year 2013, the child tax credit is $1,000. A portion
of the credit may be refundable, which means that you can
claim the amount you are owed, even if you have no tax
liability for the year. The credit is phased out for those
with higher incomes.
Earned Income Tax Credit (EITC)
For tax year 2013, the maximum earned income tax credit (EIC)
for low and moderate income workers and working families rises
to $6,044, up from $5,891 in 2012. The maximum income limit
for the EITC rises to $51, 567 (up from $50,270 in 2012) for
married filing jointly. The credit varies by family size,
filing status and other factors, with the maximum credit going
to joint filers with three or more qualifying children.
Individuals - Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings
accounts in 2013. These accounts can be used to offset the
cost of elementary and secondary education, as well as
American Opportunity Tax Credit
For 2013, the maximum Hope Scholarship Credit that can be used
to offset certain higher education expenses is $2,500 per
student, although it is phased out beginning at $160,000
adjusted gross income for joint filers and $80,000 for other
Employer Provided Educational Assistance
In 2013, as an employee, you can exclude up to $5,250 of
qualifying post-secondary and graduate education expenses that
are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number
of years for certain costs of post-secondary or graduate
courses or courses to acquire or improve your job skills. For
2013, the modified adjusted gross income threshold at which
the lifetime learning credit begins to phase out is $104,000
for joint filers and $52,000 for singles and heads of
Student Loan Interest
In 2013 you can deduct up to $2,500 in student-loan interest
as long as your modified adjusted gross income is less than
$60,000 (single) or $125,000 (married filing jointly). The
deduction is phased out at higher income levels. In addition,
the deduction is claimed as an adjustment to income so you do
not need to itemize your deductions.
For 2013, the elective deferral (contribution) limit for
employees who participate in 401(k), 403(b), most 457 plans,
and the federal government's Thrift Savings Plan is $17,500.
For persons age 50 or older in 2013, the limit is $23,000
($5,500 catch-up contribution). Contribution limits for SIMPLE
plans remain at $12,000 for persons under age 50 and $14,500
for persons age 50 or older in 2013. The maximum compensation
used to determine contributions increases to $255,000.
In 2013, the AGI limit for the saver's credit (also known as
the retirement savings contributions credit) for low-and
moderate-income workers is $59,000 for married couples filing
jointly, $44,250 for heads of household, and $29,500 for
married individuals filing separately and for singles.
Please contact us if you need help understanding which
deductions and tax credits you are entitled to. We are always
available to assist you.
Financial Services at Sullivan & Company, CPAs
Grow leads our Financial Services Division and is here to
help you navigate your financial future. As an Investment
Advisor Representative, she is able to provide an
independent opinion on the investments you already own or
are considering buying.
We can structure a portfolio
based on your risk tolerance or we can help you decide how
to invest in your company 401(k) plan. We work with each
client to identify their concerns and to provide solutions
according to their situation.
is also experienced in company retirement plans. If you own
a business that does not have a plan; we can discuss your
options and set up a plan that fits your company.
If your business already has a
plan; we offer a free evaluation of the plan to ensure that
it is up to date and working well for you and your
Our goal is to provide personal, unbiased and independent
advice to help you make well-informed decisions about your
financial life and investments.
Contact Kathy Grow or Jordana Para to set up a free initial
consultation (301) 657-8080.
And as always if you have any questions about accounting or
investments and how they effect you or your business, please give
us a call at
(240) 316-3564. We
can help guide you in the right direction.
Remember you can call our offices if you have any
questions about these or any other accounting, tax,
financial planning or insurance related issues, at
Regards, Paul Sullivan, CPA
President, Sullivan & Company