February 3, 2014

Since its inception in 1861 — as a “temporary” measure to finance the Union’s war effort – legislating federal income tax law has been a political and social battlefield that creates new winners and losers out of every new tax bill, amendment or repeal. So, what about this season? What major tax changes in 2014 should you worry about?

New Tax Bracket, Obamacare, and the Slow Death of Personal Exemptions

A new marginal tax rate of 39.6 percent for those with incomes above $400,000, $450,000 for married couples filing jointly, was the price Republicans paid for permanently extending the George W. Bush-era tax cuts for taxpayers with incomes under $400,000.

Additionally, two new taxes start this year to pay for the new healthcare acts of 2010. One charges a 0.9 percent tax on any income over $200,000, $250,000 for married couples; and the other hits investors with a 3.8 percent tax on investment income over those same thresholds.

Another sacrifice on the altar of Bush-era tax cuts was the phaseout of personal exemptions, which reduces personal exemptions by 2 percent for every $2,500 above a threshold of $250,00 in adjusted gross income — $300,000 for couples. All things considered, the compromise was a great deal for high-income taxpayers, which the ultra-wealthy ended up paying for.

Marriage Penalty

Thanks to the 2013 landmark wins in the Supreme Court for gay marriage, many same-sex legally married couples will start to feel the burn of the marriage penalty. Although many married couples benefit from filing jointly and pay lower tax rates than single taxpayers, when both spouses have high incomes their overall tax rate can be higher.

To illustrate, if two single people earn $400,000 of taxable income, they will not have to pay the new 39.6 percent tax bracket. If those two same people happen to be married, they will have to pay the 39.6 percent rate on $350,000 of their income, which translates into a marriage penalty of more than $30,000.

According to research by The William Institute at UCLA, people in same sex-sex marriages are more likely to be in the work force and their median income is significantly higher ($94,000) than for heterosexual couples ($86,000). This makes legally married gay taxpayers prime targets for a marriage penalty.

Medical Expenses

Although we can still deduct our medical expenses from our taxable income, it will be more difficult to qualify. Last year the threshold for deducting medical costs was 7.5 percent. This year the threshold rises to 10 percent. However, taxpayers who are older than 65 can keep the previous rate until 2017.

2013 Tax Legislation Losers

So let’s add up the score. A new top tax bracket with a marginal tax rate of 39.6 percent; the phasing out of personal exemptions and the limitation of itemized deductions previously enjoyed by those with incomes above $250,000; and two new “Obamacare” taxes for those with incomes above $200,000; would make you think the wealthy are the biggest tax losers of 2013. And you would be right, with one caveat: it could have been so much worse if Bush-era cuts had not been extended.

In any case, high-income taxpayers are not alone. Same-sex married couples start this year to feel a thorn in the flesh that is the marriage penalty, and we all will have a harder time taking medical deductions.

There is good news, though. Most of the education credits and deductions, such as the American Opportunity Credit, were extended in 2013. The alternative minimum tax exemptions were permanently indexed to inflation, which saved many middle income families from getting sucked into a higher tax rate. Finally, several aspects of filing your taxes, such as the much-maligned home office deduction and the reporting of stock sales, have been streamlined and are now easier to calculate.

Photo: GQ