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7 Key Changes to the 1040 Tax Form

What you need to know before completing your 2013 return

By Bill Bischoff | MarketWatch | February 11, 2014

Time marches on, and you’ll soon be receiving your 2013 W-2 and 1099s, if you haven't already. So it’s not too early to start thinking about putting together your Form 1040 for last year. As you do, take note of the seven following key federal income tax changes that took effect in 2013:
 
New Higher Tax Rates for Some
 
For most people, the 2013 federal income tax rates are the same as for 2012: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. However, the American Taxpayer Relief Act increased the maximum rate for 2013 to 39.6 percent. That rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000 and heads of households with income above $425,000.
 
For most individuals, the 2013 federal income tax rates on long-term capital gains and dividends are also the same as for 2012: either 0 percent or 15 percent. However, the new law raised the maximum rate for 2013 to 20 percent for singles with taxable income above $400,000, married joint-filing couples with income above $450,000 and heads of households with income above $425,000. Folks with 2013 taxable income below these levels will pay a 15 percent federal rate on long-term gains and dividends or 0 percent for gains and dividends that would otherwise fall within the 10 percent or 15 percent brackets.

(MORE: A Guide to Self-Employment Retirement Plans)
 
New Medicare Surtax on Investment Income
 
Starting in 2013, if you have a sizable income, all or part of your net investment income, including long-term capital gains and dividends, can potentially get socked with an additional 3.8 percent “Medicare contribution tax.” As a result, the maximum federal rate on long-term gains for 2013 is actually 23.8 percent (versus the 15 percent maximum rate on 2012 returns). The new 3.8 percent Medicare tax only applies if your adjusted gross income (AGI) exceeds: $200,000 if you’re unmarried, $250,000 if you’re a married joint filer or $125,000 if you use "married filing separately" status.

(MORE: 7 Secrets of Highly Effective Retirement Savers)
 
Specifically, the 3.8 percent Medicare tax hits the lesser of your net investment income or the amount of AGI in excess of the applicable threshold. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities, gains from assets held for investment (like stocks and bonds), the taxable portion of personal residence gains and income and gains from the business of trading in financial instruments or commodities. Income and gains from assets held for business purposes are not subject to the 3.8 percent tax.
 
For example, a married joint-filing couple with 2013 AGI of $295,000 and $60,000 of net investment income would owe the 3.8 percent tax on $45,000 (the amount of AGI over the $250,000 threshold for joint filers). If the same couple had AGI of $350,000, they would owe the 3.8 percent tax on $60,000 (the entire amount of their net investment income). To figure out if you owe the new 3.8 percent Medicare surtax, fill out IRS Form 8960 (Net Investment Income Tax).
 
New Medicare Surtax on Salaries and Self-Employment Income
 
Before 2013, the Medicare tax on salary and/or self-employment income was a flat 2.9 percent. If you were an employee, 1.45 percent was withheld from your paychecks and the other 1.45 percent was paid directly by your employer. If you were self-employed, you paid the whole 2.9 percent yourself.
 
Starting in 2013, however, an extra 0.9 percent Medicare tax is charged on salary and/or self-employment income above $200,000 for an unmarried individual, combined salary and/or self-employment income above $250,000 for a married joint-filing couple and salary and/or self-employment income above $125,000 for those who use "married filing separately" status.
 
To discover whether you owe the new 0.9 percent Medicare surtax, fill out IRS Form 8959 (Additional Medicare Tax).

(MORE: 4 Mistakes to Avoid When Enrolling in Medicare)
 
New Personal and Dependent Exemption Deduction Phase-Outs
 
The last time we saw a phase-out rule for personal and dependent exemption deductions was back in 2009. Sadly, the phase-out deal is back for 2013 and beyond. As a result, if you had a high income last year, your personal and dependent exemption write-offs might be reduced or even completely eliminated.

The phase-out starts at the following AGI thresholds: $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households and $150,000 for married individuals filing separately.

New Itemized Deduction Phase-Outs
 
The last time we saw a phase-out rule for itemized deductions was also back in 2009. This phase-out provision has also been resurrected for 2013 and beyond. As a result, high-income taxpayers can potentially lose up to 80 percent of their 2013 write-offs for home mortgage interest, state and local income and property taxes, charitable contributions and miscellaneous itemized deduction items (such as investment expenses and fees for tax advice and preparation).

The phase-out starts at the following AGI thresholds: $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households and $150,000 for married individuals filing separately. More specifically, the total amount of your affected itemized deductions is reduced by 3 percent of the amount by which your AGI exceeds the threshold. However, the reduction cannot exceed 80 percent of the total affected deductions that you started off with.
 
New Higher Threshold for Itemized Medical Deductions
 
Before 2013, you could claim an itemized deduction for medical expenses paid for you, your spouse and your dependents to the extent the expenses exceeded 7.5 percent of AGI. Starting in 2013, the hurdle is raised to 10 percent of AGI for most folks. However, if either you or your spouse were 65 or older as of December 31, 2013, the new 10 percent threshold will not affect you until 2017.
 
New Tax Rules for Legally-Married, Same-Sex Couples
 
Thanks to the well-publicized 2013 Supreme Court decision, same-sex marriages that are recognized under state or foreign laws must now be recognized for federal tax purposes. So folks who were married under such laws as of the end of 2013 must use either "married filing jointly" status or "married filing separately" status for their 2013 federal income tax returns.

In most cases, filing jointly will be the tax-smart choice. In any case, members of legally married same-sex couples cannot file their federal returns as unmarried individuals for 2013 and beyond.
 
Members of same-sex couples who have entered into civil unions or domestic partnerships are still treated as unmarried individuals for federal tax purposes, though. 

Bill Bischoff covers tax and retirement issues for MarketWatch.com.