April 15 is rapidly approaching, and that means it is tax season. As you prepare your 2013 return, there are a few changes to the law that you should be aware of in order to reduce your audit risk, particularly if you have a high income.
Increased marginal rate, new Medicare taxes, reduction in deductions
The tax legislation passed in 2013 made the Bush-era tax cuts permanent with the exception of the cut affecting those in the highest income bracket. Functionally, this means the top marginal tax rate has increased from 35 percent to 39.6 percent for single filers making more than $400,000, married couples filing jointly with more than $450,000 in income and heads of household making in excess of $425,000. Top earners will also pay a higher capital gains rate of 20 percent (the capital gains rate of 15 percent will remain unchanged for those in lower income brackets).
New Medicare taxes for high income households could be problematic on 2013 returns. There is a new 3.8 percent Medicare tax on net investment income for singles with $200,000 or more in earnings or married couples whose income exceeds $250,000, as well as a 0.9 percent Medicare surcharge tax for these taxpayers. The net investment tax can be tricky, because it is only due on "passive" investment income. If you assumed a great level of personal involvement and/or took on high risk with an investment, this is considered an "active" activity and the income derived from it may not be subject to the new tax.
In addition to taxes going up for certain taxpayers, some deductions have changed. For example, unreimbursed medical expenses that added up to at least 7.5 percent of a taxpayer's income could formerly be deducted, but now the threshold has been increased to 10 percent of a taxpayer's income. A number of other deductions and exemptions will be phased out this year for singles with an adjusted gross income in excess of $250,000 and married couples filing jointly whose income exceeds $300,000.
One change to tax law that is income neutral is the treatment of same-sex couples married under the laws of a state. Since the Supreme Court struck down portions of the federal Defense of Marriage Act this summer, same-sex couples must file either as married filing separate or married filing jointly; the partners to a same sex marriage may no longer file as single, even though this is the status they had to choose in previous years.
Lost in the tax system? Get help dealing with your IRS problems from a tax attorney
Navigating the tax system is already difficult enough, and the changes being implemented in 2014 add a new layer of complexity. High earners bear the brunt of the changes, and are already at heightened risk of facing an audit: according to a USA Today report, while only around one percent of individual tax returns result in an audit each year, for those with an income of $200,000 or more, the audit rate is 3.7 percent.
By being aware of the tax changes for this year and taking precautionary measures, you can help reduce your audit risk. But if you are already facing problems with the IRS, waiting to get help can be a grave error. An experienced tax attorney can assess your situation and advise practical steps you can take to reach a satisfactory resolution. Stop worrying about the IRS: bring your audit or tax issues to an experienced tax attorney today.