Higher-income Americans hit hardest by tax changes

Higher-income Americans and some legally married same-sex couples are likely to feel the biggest hits from tax law changes when they file their returns in the next month or two. Taxpayers also will have a harder time taking medical deductions this year.

In other changes, the tax rate tables and the standard deduction have been adjusted for inflation, as has the maximum contribution to retirement accounts, including 401(k) plans and Individual Retirement Accounts.

The Alternative Minimum Tax has been patched -- permanently -- to prevent more middle-income taxpayers from being drawn in. And starting with the 2013 tax year, there's a simpler way to compute the home office deduction.

Tax provisions for the 2013 tax year were set by Congress last January as part of legislation to avert the fiscal cliff of tax increases and spending cuts. "We finally got some certainty for this year," said Greg Rosica, a contributing author to Ernst & Young's "EY Tax Guide 2014."

Nevertheless, the tax filing season is being delayed because of the two-week-long government shutdown. The Internal Revenue Service says it needed the extra time to ensure that systems are in place and working. People will be able to start filing tax returns Jan. 31. Before the shutdown, the original start date was Jan. 21.

"People who are used to filing early in order to get a quick refund are just going to have to wait," said Barbara Weltman, a contributing editor to "J.K. Lasser's Your Income Tax 2014."

Don't think the delay will mean a change to the tax deadline, however. "The April 15 tax deadline is set by statute and will remain in place," the IRS says.

The tax legislation passed at the start of 2013 permanently extended the Bush-era tax cuts, but also added a top marginal tax rate of 39.6 percent for those at higher incomes -- $400,000 for single filers, $450,000 for married couples filing jointly and $425,000 for heads of household.

On top of that, higher-income taxpayers could see their itemized deductions and personal exemptions phased out and pay higher capital gains taxes -- 20 percent for some taxpayers.

And, there are new taxes for those taxpayers to help pay for health care reform.

However, there are different income thresholds for each of these new taxes.

The additional 0.9 percent Medicare tax, for example, kicks in on earnings over $250,000 for married couples filing jointly and $200,000 for singles and heads of household. Same for the 3.8 percent tax on investment income.

But the phaseout of personal exemptions and deductions doesn't begin until $300,000 for married couples filing jointly and $250,000 for singles.

That means that taxpayers who didn't plan could find themselves with big tax bills come April 15 -- and perhaps penalties for under-withholding.

"It's a snowball effect," said Dave Du Val, TaxAudit.com's vice president of customer advocacy.

Confused yet?

"The complexities of the tax code are only affecting those of us trying to read it," National Taxpayer Advocate Nina Olson said in an interview. Tax software makes a lot of those complexities invisible to the average taxpayer.

As a result, taxpayers might not realize they're being helped by a wide array of deductions and credits. "They have no idea of the benefits they are getting through the tax code," she said.

The IRS processed more than 147 million tax returns in 2013, down slightly from the previous year. More than 109 million taxpayers received refunds that averaged $2,744, also slightly less than in 2012.

The upward trend of electronic filing continued, with more than 83 percent of returns being filed online. The biggest jump, 4.6 percent, was among people who used a software program to do their own taxes.

The IRS is continuing to offer its Free File option, which is available to taxpayers with adjusted gross incomes of $58,000 or less. Through the program, these taxpayers can use brand-name software to file their taxes at no cost. Some states also participate. The agency also has an option for taxpayers of all incomes -- Free File Fillable Forms -- which does basic calculations but does not offer the guidance that a software package would.

For the 2013 tax year, the personal exemption is $3,900. The standard deduction is $12,200 for married taxpayers filing jointly, $6,100 for singles, and $8,950 for heads of household.

Many credits and deductions were extended for 2013, including several for education. Among them: the American Opportunity Credit of up to $2,500 per student for tuition and fees and deductions for student loan interest and tuition-related expenses. Many of these are phased out at higher income levels.

Schoolteachers will still be able to deduct up to $250 in out-of-pocket expenses for books or other supplies.

Taxpayers will still be able to deduct their medical expenses, but it will be more difficult for many to qualify. The threshold for deducting medical expenses now stands at 10 percent of adjusted gross income, up from 7.5 percent. There's an exception, though, for those older than 65. For them, the old rate is grandfathered in until 2017.

Among the other changes for 2013, taxpayers who work at home will now have a simplified option for taking a home office deduction.

"You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively," the IRS says.

But, if you sit at your kitchen table and check work email, it doesn't qualify. "The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job," according to the agency.

The IRS said that for tax year 2011, the most recent year for which the numbers are available, more than 3.3 million people claimed nearly $10 billion in home office deductions using Schedule C. The number does not include the home office deduction taken by farmers, which is claimed on a different form.

Most taxpayers claiming the deduction are self-employed, according to the IRS.

Until this year, you had to figure actual expenses for a home office, according to Weltman. "Starting with 2013 returns, if you're eligible for the deduction, you can take a standard deduction of $5 per square foot, up to 300 square feet," she said. The maximum deduction using this method is $1,500.

The IRS says people who take the simplified option will have to fill out one line on Schedule C, as opposed to a 43-line form.

Weltman likened the simplified home office deduction to the IRS deduction for business use of your car. "You can do your actual costs or the IRS mileage rates."

The standard mileage rate for business use of a car in 2013 is 56.5 cents a mile.

Many investors also will find it easier to report stock sales if the 1099-B forms they receive contain key details of the sale and the correct basis for computing gains and losses.

Beginning this year, same-sex couples who are legally married will for the most part have to choose married filing jointly or married filing separately when doing their tax returns. This is true even if the couple lives in a state that does not recognize gay marriage. "For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married," the agency said.

The change is a result of the Supreme Court's ruling last June invalidating provisions of the Defense of Marriage Act.

"It's not a choice. That's the way it is," Rosica said.

Many of these couples will now find themselves hit by the marriage penalty, especially if both spouses work.

For example, with their incomes combined, they might hit the threshold for the extra Medicare taxes, or the beginning of the phaseout of deductions and the standard exemptions.

However, when it comes to things like estate taxes, the federal recognition of same-sex marriage will help legally married gay and lesbian couples. That was the issue in the Supreme Court decision in the case of Edith Windsor, who had to pay estate taxes after her lesbian spouse died.

In addition, health insurance purchased from an employer for a same-sex spouse can be paid for pre-tax and excluded from income.

"Like opposite-sex couples, gay and lesbian married couples can qualify to use the head of household status, when kids are involved, where the spouses are living apart," the IRS says.

Same-sex married couples also have the option of filing amended returns going back to 2010, using the married filing jointly status. Rosica said each couple will have to look at their individual circumstances to see if that's beneficial from a tax perspective.

When it comes to filing state returns, same-sex married couples living in states that don't recognize gay marriage most likely will have to file as singles. Since federal returns often are used as a starting point for state returns, that could force them to calculate their federal taxes twice, once for filing the federal return and once for figuring out their state taxes.

If you made energy efficiency improvements to your home, such as installing new windows or a qualifying furnace or heat pump, you might be able to take an energy credit of 10 percent of the cost up to a lifetime maximum of $500.

However, of that total, the IRS says, "only $200 can be for windows; $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property."

There are additional credits for solar. However, the credit for plug-in electric vehicles has expired.

Once again, the IRS is reminding taxpayers to make sure their Social Security number is entered correctly and their return is signed. Those who feel they need more time can apply for an extension, until Oct. 15. But if you do file for an extension, remember to estimate and make sure you pay any taxes due -- or face a possible penalty.