What You Need to Know About Tax Changes for 2013

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As the “fiscal cliff” deadline looms, many taxpayers are becoming increasingly nervous about how the tax changes will affect them in the upcoming year. Those who have done a bit of year-end planning may find themselves ahead of the game when April 15th rolls around. While there may be more changes to come, here are some of the changes which have already been put into place for 2013:

  • Increased limitation on 401(k) maximum amount from $17,000 -$17,500. Those over 50 are still eligible for the $5,500 “catch up provision” which could make the total pre-tax deferral amount as much as $23,000.
  • The gift tax will increase to $14,000 per person in 2013 or $28,000 for a married couple.
  • Flexible spending accounts in the workplace which had a $5,000 yearly cap will move down to $2,500 meaning you should consult a tax professional to determine the amount you choose to set aside in your FSA plan.
  • In 2013 you will be allowed up to $1,000 of tax free earnings through something known as the “kiddie tax.” Parents should consider such plans as the 529 plan, Uniform Gifts to Minors Act and Uniform Transfer to Minors Act

Depending on the outcome of the fiscal cliff talks, payroll taxes could go up, income tax rates could go up, dividend and capital gains taxes could increase and the child tax credit could be slashed in half. Lawmakers have also kicked around the idea of limiting the current deduction homeowners are allowed to take for mortgage interest—a move which could seriously impacts homeowners, particularly those with larger mortgages.

How You Can Prepare for the Changes

As always, you must keep meticulous records if you plan on itemizing deductions, and you still have until December 31st to make donations and claim them in 2013. For donations under $250, keep an accurate banking record however for donations above $250 it is necessary that you obtain a correctly worded acknowledgement letter regarding the donation. If you have mountains of medical bills and are expecting more, try to get any necessary appointments in before the end of 2012. The law currently mandates that 7.5% of wage earners’ adjusted gross income must be spent on medical and dental costs prior to itemizing them however that figure will rise to 10% in 2013.

As of January 1, 2013, workers who earn more than $200,000 will experience more deductions from their paycheck, and the Medicare tax on wages increases from 1.45 to 2.35 percent. The Educator Expense deduction in the amount of $250, given to teachers who purchased classroom items which were non-reimbursable through their school was allowed to expire along with the deduction for tuition, books and other related college expenses. If you are uncertain about how any of the tax changes which have already taken place or may occur will affect your finances it is important that you speak to a tax professional as well as a tax attorney who can help you determine the best course of action, particularly if you already owe back taxes to the IRS.

When You Should Not Take Advantage of a Tax “Loophole”

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Most of us think of a tax loophole as a gift from the IRS. A tax loophole is actually an exploitation of a current tax law which allows the taxpayer to reduce or even eliminate taxes owed. A prime example of a tax loophole is the substantial tax break which was offered several years ago to small businesses that purchased SUVs for their business transportation needs. This particular tax law allowed 50% use of the vehicles to be for personal use. Many small business owners took this opportunity to upgrade their personal vehicle to receive this tax credit, thus exploiting the way the law is written for personal gain.

It is a sure bet that few legislators would define changes to the tax code as a loophole yet once the new law goes into effect, experts in tax laws may be able to discover flaws in the wording which allow taxpayers to get an unintended break. In some instances this type of loophole could be reported to lawmakers and the law re-written, however other loopholes could exist for years until finally discovered. Consider the tax known as the marriage penalty which caused married couples to pay more taxes than unmarried couples with the same income. Some couples decided to get a quickie divorce in a foreign country prior to the last day of the year, remarrying (legally) when January 1st rolled around. This is an obvious tax loophole which writers of the tax code simply never anticipated.

More Unexpected Tax Loopholes

Lest you be under the impression that tax loopholes are not a huge issue, consider the fact that between 2008 and 2010 a significant number of the Fortune 500 companies paid more for lobbyists than they paid in taxes in order to lodge themselves firmly in the pocket of Congress and, in effect buy the tax breaks and loopholes which would benefit their company. Not only did some 30 of these firms make billions in profits, they also avoided paying taxes and received over $10 billion in rebates. These, of course, are the blatantly obvious tax loopholes, yet there are hundreds more taken advantage of each and every year when tax season rolls around.

The Risks of Taking Advantage of Tax Loopholes

Be aware that engaging in tax loopholes can be a potentially risky business. Simply because the tax laws are laborious and, in many cases, ambiguous, is no excuse for skating out on the thin ice of a tax loophole, particularly one you are well aware was not meant to be used in the way you are anticipating. Should your tax returns be randomly selected for an audit, you may wish you had avoided that loophole altogether when you are forced to explain it to the IRS.

Even though you may attempt to justify using a tax loophole to your advantage, the reality is that should you get caught, you could end up paying back taxes as well as penalties and interest for doing something you knew you should have avoided. If you are uncertain whether a particular tax law could help you out—legitimately—talk to a tax professional If you find yourself in trouble with the IRS because you have indulged in tax loopholes in the past, find a knowledgeable tax attorney as soon as possible.