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4 Tax Changes You Should Be Aware Of (USA)
Let’s face it: like it or not, taxes are going up this year. If you’re one of the 113 million taxpayers in the United States, prepare yourself now.
With the U.S. national debt at a mind-blowing $16.48 trillion (and increasing every second, according to USDebtClock.org), the federal government is doing what it can to bring down that debt without inflicting serious harm on the American economy. Unfortunately, seeing as we’re $70.3 billion (at the time of writing) over our “debt ceiling” ($16.394 trillion—the maximum debt load the government is allowed to hold before automatic and severe spending cuts and tax increases are implemented) and Congress has pushed the issue off until May (by which time we’ll be hundreds of billions of dollars over the ceiling), taxes are likely to increase again next year.
In the meantime, there are ways to shield yourself and your household from these new changes in tax policy—especially if you make under $400,000 (or better(?) yet: $200,000) per year.
Bush Tax Cuts
Set forth in 2001 and originally expected to expire in 2010, Congress extended these tax cuts permanently for approximately 99% of Americans in the fiscal cliff compromise. As such, we don’t have to worry about significant tax hikes in this arena, but payroll taxes are still on the rise. The two year payroll tax holiday—in which Social Security taxes were reduced from 6.2% to 4.2%—has come to an end, which means you’ll be seeing less in your usual paycheck from January 1 onward. For those who are self-employed, the tax rate will return to 12.4%. This tax burden is inevitable and for Social Security, it applies to income up to $113,700, which is the new maximum taxable earnings cap.
Family Tax Credits
To reduce your family’s tax burden in 2013, be sure to take advantage of the five year extension Congress granted to various family tax credit programs. These include: the child tax credit, an up-to-$2,500 tax credit for college tuition, and the earned income tax credit (EITC). For those who make less than $50,000 per year, the EITC could save you between a couple hundred dollars (for those without children) and in upwards of $1,000 per child. It’s estimated that this credit returned $62 billion to American workers in 2012 and could save you money in 2013 (potentially offsetting at least a portion of the increase in FICA taxes you’ll be paying).
In addition to the American Education Opportunity Tax Credit ($2,500 for college tuition), the Higher Education Tuition Deduction was extended from 2012 to 2013. It allows individuals to deduct between $2,000 and $4,000 of tuition costs. To increase your resume’s marketability and qualify for these tax deductions, consider going back to school in 2013. Since the recession began, millions of people have gone back to college to get a certificate or a degree to help them qualify for a raise at work or move into an entirely new industry. The dilemma with education: student loans and tuition hikes instated by public universities. If you decide it’s worth your time, don’t miss out on the valuable tax credits designated specifically for education.
The $500 Energy-Efficient Home Improvement Tax Credit designed to cover the cost of certain energy-saving home improvements to your primary residence was also extended in the 2013 fiscal cliff compromise. Improve your home’s energy sustainability, reduce your carbon footprint, and save more on taxes in 2013 before this tax credit is subject to expiration in 2014.
A few more things to remember for 2013…
For any contractual or freelance work where you earned $600 or more from a given client, the IRS dictates that you’ll need a 1099-MISC form. If you were on unemployment in 2012 (good news: benefits were extended through 2013 as a part of the fiscal cliff compromise), you will need to file a 1099-G form. Other 1099 forms encompass interest on savings accounts, pensions, Social Security, and capital gains.
Although certain deductions are being phased out for higher income individuals, you could still qualify for several different deductions, such as property taxes, child care, medical expenses (if they are greater than 7.5% of your adjusted gross income), home office expenses, and more. See the IRS’s website for more information on what itemized deductions are available to you.
When it comes to refunds, requesting a direct deposit into your checking or savings accounts and filing electronically can significantly speed up the refund process.
Although Congress raised taxes as a component of the last-minute fiscal compromise on January 1 of this year, there are still multiple avenues through which you can save money on taxes this year. Whether it’s tax credits, personal exemptions, or itemized deductions, don’t let the media’s hype about taxes going up distract you from your financial goals this year.
Photo Credit: 401(K) 2013