Higher-income Americans hit hardest by tax changes

WASHINGTON - 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 federal returns in the next few months. Taxpayers also will have a harder time taking medical deductions.

In other changes for the 2013 tax year, the Alternative Minimum Tax has been patched - permanently - to prevent more middle-income people from being drawn in, and there's a simpler way to compute the home office deduction.

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 provisions 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 filing season is being delayed because of the two-week government shutdown last October. The IRS says it needs the extra time to ensure that systems are in place and working. People will be able to start filing returns Jan. 31, a week and a half later than the original 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."

There is no change in the April 15 deadline, however. That's set by law and will remain in place, the IRS says.

The tax legislation passed at the start of 2013 permanently extended the Bush-era tax cuts for most people, 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 them to help pay for health-care reform.

There are different income thresholds for each of these new taxes.

An 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 a 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.

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?

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.

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 they live in a state that does not recognize gay marriage.

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

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