Surprises can be fun, but not when they come in the form of unexpected taxes. When filing your 2013 taxes, be sure to keep an eye out for these four tax curveballs:
1. New tax brackets. There is a new top tax bracket of 39.6 percent, though it appears that it only affects a small percentage of taxpayers: single folks whose income exceeds $400,000 or married taxpayers with incomes of more than $450,000 who are filing a joint return. This could be bad news if you earn this high level of income (or you and your spouse do), so make sure to consult with a tax professional to find out what this new tax bracket means for you.
2. The Alternative Minimum Tax (AMT). This surprise is a real grabber. The AMT is designed to limit the benefits that can reduce a taxpayer’s regular tax amount in order to keep the wealthy from using loopholes to avoid paying taxes. It ensures that taxpayers pay at least a minimum amount of tax.
The AMT exemptions for 2013 are $51,900 for single and head of household taxpayers and $80,800 for married people filing jointly. The IRS has a tool to help determine if you are subject to the AMT, but you’re probably better off using your tax software or contacting your tax pro to see where you really stand before filing your 2013 taxes.
3. Cancellation of Debt Income (COD). This is always a shock. Many people have been out of work over the past few years due to the economic downturn and have lost homes, been unable to pay credit cards, and defaulted on loans.
Once your debts are settled, you likely will feel relieved and then want to move past the situation. Unfortunately, though, you still have to deal with the tax implications of your debt. If you’re liable for a debt that has been cancelled, forgiven, or discharged, you may receive a 1099-C form showing your debt relief as taxable ordinary income (unless you meet an exclusion or exception). This income may push you into a higher tax bracket.
You were probably insolvent at the time of the debt, meaning you couldn’t meet your financial obligations. Fortunately, there’s a special computation associated with Form 982 to avoid the taxes on insolvency. (You’ll find more information about how this works on the TaxMama® site.)
4. Barter income. In this slow economy, more people than ever are trading their services for other services or items. Barter clubs track these trades and issue Form 1099-Bs. But even informal barter is taxable, especially when a business barters its services. For instance, if a plumber trades his services to get gardening services at his home, both the plumber and the gardener have reportable income.
The U.S. Tax Code is always full of surprises. In future posts, I will be sharing more tips on how to make those surprises less painful.
Eva Rosenberg, EA is the publisher of TaxMama.com ®, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.