We're not expecting a bunch of new tax laws in the 2014 and 2013 tax years -- although it's not too late for some surprises. Learning about these tax law changes and planning for them may help you keep more of your hard-earned cash.
Here are a few of the most significant recent changes that you should be aware of.
1. The health insurance mandate
The law: Thanks to the Patient Protection and Affordable Care Act, you must carry a minimum level of health insurance for yourself, your spouse, and your dependents starting in 2014. If you fail to do so, you could possibly pay a fine. This fine in 2014 could be up to 1% of your yearly income or $95 per person for the year, whichever is higher. The penalties go up for 2015 and again for 2016.
You won't see this item on your 2013 tax return; the mandate begins in 2014.
What to do: If you're already covered through work, a government program, or coverage you pay for yourself, you're set. If you have little or no income and are therefore not required to file a federal income tax return, you also don't have to worry about it. If, however, you have income but no insurance, you'd do well to start shopping. Unless further rule changes are made, you must be covered by March 31 to avoid the fine.
2. New 3.8% Medicare investment tax
The law: Starting with 2013 tax returns, Obamacare includes an additional 3.8% Medicare tax on investment income, including interest, dividends, capital gains, rentals, and royalty income. You pay this tax if your modified adjusted gross income is $200,000 or more ($250,000 if filing jointly, or $125,000 if married filing separately). It's in addition to capital gains or other tax you already pay on investment income.
What to do: There's little you can do to reduce this tax for 2013, but you can try to reduce its impact in 2014.
Timing is everything, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Try to realize capital gains in years when you are under these limits. Because the limits penalize married couples, realizing investment gains before you tie the knot may help in some circumstances. The use of depreciation, installment sales, and other tax deferment strategies suddenly becomes more attractive with the addition of this tax.
3. New Medicare health insurance tax on wages
The law: If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act also asks you to pay a little more of your wages. It levies a special 0.9% tax on your wages and other earned income.
What to do: You'll pay this all year as your employer withholds the Additional Medicare Tax from your paycheck. If you're self-employed, be sure to plan for this tax when you calculate your estimated taxes.
If you're employed, there's little you can do to reduce the bite of this tax. Requesting noncash benefits in lieu of wages won't help. They're included in the taxable amount.
If you're self-employed, you may want to take special care in timing income and expenses, especially depreciation, to avoid the limit.
4. Energy credits
The law: You can still get an energy efficiency tax credit for qualifying energy-efficient products such as solar hot water heaters, solar electric equipment and wind turbines. The credit is 30% of the cost of these products you installed in or on your home.
There is no limit to the amount of credit you can take, and you can carry forward any unused credit to future tax years. This credit has been extended to 2016.
What to do: The sooner you install energy-efficient products, the sooner you'll start saving money on heating and cooling your home. The energy credit is a bonus -- if you're a homeowner, don't pass it up.
5. Simplified option for home office deduction
The law: In the past, taking a deduction for a home office has often seemed more trouble than it's worth, as you prorated utilities and other expenses to the portion of your home you used for business. Starting in 2013, the IRS offers a so-called "simplified option" for determining your deduction, based on $5 per square foot of home use for business (up to 300 square feet.)
Even better, when you use this simplified option, you can still deduct mortgage interest and real-estate taxes in full. When you sell your home, you won't have to worry about calculating depreciation on your home or recapturing depreciation.
What to do: If you qualify for the home office deduction, there's no better time to take it. It's worth even designating a room of your house to your business, assuming you meet the qualifications.
6. Medical expenses
The law: Another recent tax change is the floor for deducting medical expenses. In the past, you could deduct medical expenses once they passed 7.5% of your adjusted gross income. Starting in 2013, you can only deduct them to the extent they exceed a whopping 10% of your adjusted gross income. (If you or your spouse is over age 65, the old 7.5% floor still stands.)
What to do: If you have big medical expenses, try to pay them in a year when you can take advantage of the deduction. Medical expenses are deductible in the year you pay them, not necessarily when you incur them.
For example, say you're putting braces on the kids' teeth. If you stagger the ordeal out, perhaps making payments to the orthodontist, you may never get a deduction for the expense. However, if you pay for as much orthodontia as possible in one year, you could easily pass the 10% floor and get some consolation in the form of a tax deduction.
7. Same-sex marriages
The law: Starting with 2013 tax returns, taxpayers who are in a same-sex marriage on the last day of the year and who were legally married in a state that recognizes same-sex marriages must use the "Married Filing Jointly" or "Married Filing Separately" filing status.
They also have the right, but not the obligation, to amend their returns for up to three years back.
What to do: If you're already married, start tax planning as a couple now. Don't wait for surprises when you file next year. Being married changes your tax outlook in more ways than you might expect. You may be able to offset each other's investment gains and losses, for example, or qualify for a spousal IRA. If you have similar incomes, you may get hit with the "marriage tax" and pay significantly more tax as a couple than you did as two single taxpayers. It's a great motivation to start planning your taxes more aggressively.
If you're not married yet, consider the effect of getting married on your taxes. You probably won't base your decision to get married on your potential tax return. However, if you're thinking about getting married near the end of the year and discover that you can save thousands of dollars by putting off the wedding for a few weeks, you might be convinced.
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