Deduction Tips for 2013
By Tim Frye
As if it wasn’t already hard enough to gain any semblace of understanding of the 17,000+ pages of tax code, things are a changing my fellow tax preparer friend. The provisions of the Economic Growth and Tax Relief Reconciliation Act, and the Jobs and Growth Tax Relief Reconciliation Act of 2003, were both extended to the end of 2012, but are now schedule to expire.
There is now a high level of social unrest regarding the possible extension, or non extension, of these provisions. Let’s go through the most important points on the provisions in limbo to see the tax changes you need to know for 2013.
What Deductions Are at Stake
Most people in the media are very caught up in the increasing tax rates issue. But the marginal tax rate changes are accompanied by many less famous but still important provisions. Some of the key extension provisions that must be addressed by Congress include:
-Deduction for Sales Tax
-Adjustment for Higher Education Tuition
-Residential Energy Property Credit
–IRS 179 and 15-year Depreciation for Certain Real Estate
-Additional Enhancements to the American Opportunity Tax Credit
-Qualified dividends special tax rate
-2% Payroll Tax Cut
-Cancellation of Debt Exclusion on Principal Residence
All of these provisions are scheduled to expire on December 31, 2012, but Congress is considering extending certain provisions as we speak, so keep your eyes peeled for these updates.
Possible Tax Changes for Your Clients
As you can see, the changes coming to your clients, and human beings in general, are going to be pretty drastic for calendar year 2013.
Qualified dividends are going back to being treated as good old ordinary income, which means your client will lose those favorable rates of 15-0%.
The American Opportunity Credit is being modified, Cancellations of Debt Exclusions on principal residence are going the way of the dinasour.
In order to offer value to your client and offer the type of service that is one and million, you need to be able to advise them as to how to navigate through the storm of change without exposing their most prized investments and assets.
It would be wise to advise your client to, if possible, bunch their itemized deductions if they usually are around the same as the standard deduction. This isn’t a fresh strategy by the way, but the method has been around because it’s effective. It is also key to note that the itemized deduction phase out for those with skyrocketing AGIs may return next year and amputate a portion of the itemizations.
Regardless of whether the rates on capital gains go back to ordinary rates in 2013, your client may still want to harvest those capital gains. These gains may be subject to the upcoming Medicare tax on unearned income in 2013. Most know taxes are not the only component that determines the need to sell and asset, but if the client is already intent on selling assets soon or in 2013, they may want to do this in 2012 and not wait to be subject to the additional 3.8 Medicare tax on investment income which is a feature of the Affordable Care Act.
Keep stacking your tax knowledge, and keep sharpening your ability to apply this knowledge to your client’s benefit. This equation will usually lead to one thing for you as a tax preparer: SUCCESS!