As we’ve seen in the last few weeks, 2013 was a relatively calm year in terms of tax changes. (Of course there’s plenty of sources that benefit from saying there’s been enormous, far-reaching changes — usually in breathless, hyperbolic language — and they’re at it again this year.) There’s been an enormous change affecting a very small percentage of taxpayers (federal government allows same-sex married couples to file joint returns). There’s been a more modest change affecting a comparably small percentage of taxpayers (those with income in top 1-2% experience tax increases that are quite modest by historical standards). And there’s been another modest change affecting a slightly larger percentage of taxpayers (new method for deducting home office expenses).
This week, I’ll finish with a look at a couple more minor changes affecting a modest number of taxpayers.
Taxpayers with significant medical expenses will be able to deduct less of those costs in 2013. Medical expenses have always been challenging to deduct. Not only do you have to itemize your deductions, but you also must have expenses that exceed 7.5% of your Adjusted Gross Income (AGI). Beginning in 2013, and only for taxpayers under age 65, the threshold you must exceed goes from 7.5% to 10%. So, for example, if you have an AGI of $100,000 and $10,000 in medical expenses, you would have been able to deduct $2,500 in 2012 ($10,000 – 7.5% of $100,000). But in 2013, this same scenario results in no deduction, because 10% of $100,000 is $10,000, which leaves nothing left to deduct.
The last change isn’t one that really shows up in the bottom line, but is a really nice change when it comes to planning. (So, of course, tax preparers love it!) The Alternative Minimum Tax (AMT) has finally been permanently indexed to inflation. This means taxpayers no longer have to wait until Congress passes legislation each year (usually at the very end of the year) to know what the inflation-adjusted tax brackets will be for purposes of the AMT. Without these annual fixes, the AMT would have wound up significantly increasing the tax liability of many middle-class taxpayers. It never actually did have this effect…Congress always would make the inflation adjustment…but it was always frustrating to not know the impact of AMT until the very end of each year. Now that AMT is permanently indexed to inflation, this annual exercise in Congressional procrastination is over.
So that’s about it for 2013. There’s some more fiddling around the edges, but nothing of significance for any significant percentage of taxpayers. Of course, that won’t stop politicians and media types from cranking up the hype machine for another tax season. Enjoy the fireworks!