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Confused parents doing taxes

Child tax credit

Credits for families with children were extended. Families keep the $1,000 child tax credit for five more years. Also extended for five years? The Earned Income Tax Credit.

Medical deductions

Medical deductions will be harder to claim in 2013. The tax deal did not eliminate changes to the threshold for claiming medical expenses. Beginning in 2013, taxpayers who itemize can only deduct those medical expenses which exceed 10 percent of AGI (those 65 and older get to keep the 7.5 percent floor until 2016). That means that fewer families will be able to claim medical expenses, making pretax plans (like flexible spending accounts) more attractive.

The American Opportunity Tax Credit

A major tax break for education was extended. The American Opportunity Tax Credit for education (a souped-up version of the Hope Credit) remains through the tax year 2017.

Above the line deductions

The new law extends a few above the line deductions (meaning those deductions that you don’t have to itemize on a Schedule A to claim) for taxpayers. Chief among them: The deduction for school teachers out-of-pocket expenses and the tuition and fees deduction for students.

Sales tax deductions

The option to deduct state and local sales taxes in place of state and local income taxes was also extended for a year. That’s a valuable benefit for taxpayers in states like New York, New Jersey and Illinois with relatively high sales tax rates or those in states that have no state income tax, like Texas and Delaware.

Adoption credit

The adoption credit was not only extended, it was made permanent. The amount of the credit will be at least $10,000 and will be indexed for inflation. Unlike previous years, the adoption credit is not refundable, meaning that if the credit exceeds your tax liability, you cannot have the excess credit refunded to you.

Estate and gift tax exemption

The federal estate and gift tax exemption was fixed permanently at $5.12 million (indexed for inflation) with a maximum tax rate of 40 percent. The law also makes permanent the portability piece of the federal estate tax; that allows spouses to share unused exemptions, meaning that a married couple could leave more than $10 million to their family without paying a dollar in federal estate tax.

With all of these changes in store, what should you do? There is no crystal ball. And absolutely no one (even the IRS who sent Congress a nasty note on this point) knows what’s going to happen in 2013. The best advice is to plan for tax laws in place as of today — but stay educated and be flexible.

More about family finances

Talking to your kids about family finances
Tips for adding to your child's college fund
Making gifts to children even after the holidays

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Comments

Comments on "The new tax picture in 2013"

Tom January 05, 2013 | 1:47 PM

This was helpful for planning 2013 taxes, and if I need to claim the full amount of capital gains in 2012, when in fact, I will not recieve actual payment until gradually over the next 5 years.

betsy January 04, 2013 | 7:48 PM

Very informative article. I know I've been concerned just as everyone else of the new tax laws and how they will affect my husband and I. We bought our first home this past year and had our first child, so I'm needless to say more than a little nervous about dotting the i's and crossing the t's of our tax returns.

Tiffany January 04, 2013 | 7:31 PM

Interesting read! I'm curious to see how all of this is going to come together when I file my taxes this year. Thanks!

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