Inflation-Related Tax Law Changes for 2013
For the 2013 tax year, many taxpayers will benefit from inflation-based adjustments to various deductions, exemptions, credits and thresholds. By law, the Internal Revenue Service must make these adjustments based on the inflation rate. While not every amount is changed every year, there are always some adjustments. A number of changes went into effect in 2013. The net effect is essentially a tax cut for the taxpayers who are affected.
Most taxpayers enjoy an exemption for themselves and any dependents. For 2013, this exemption rises to $3,900, $100 more than 2012. For the bulk of taxpayers, who don't itemize deductions, the standard deduction rises to $212900 for joint filers, $8,950 for heads of household and $6,100 for single filers and married taxpayers filing separately. Taxpayers using the foreign earned income exclusion will see a rise to $97,600, up $2,500 from 2012.
The earned income tax credit (EITC) is an important tax benefit for low- and middle-income taxpayers, particularly those with dependent children. For 2013, the maximum credit rises from $5,891 to $6,044. For purposes of qualifying for the EITC, the maximum income rises to $51,567, up from the 2012 maximum of $50,270.
The phase-out of the lifetime learning credit begins at a modified adjusted gross income of $107,000 for joint filers, a rise from 2012's $104,000 limit. For singles and heads of household, the limit goes from $52,000 to $53,000.
Phase-out limits for the deduction on student loan interest are unchanged for 2012 with the deduction phasing out from $60,000 to $75,000 for individual taxpayers and from $125,000 to $155,000 for joint filers.
All tax brackets except the highest benefit from a widening in 2013, thanks to the IRS inflation adjustments. A 39.6 percent tax bracket has been added to the previous 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent brackets.
Wealthy taxpayers see a rise in the amount that can be left to heirs without paying estate tax for 2013, up to $5.25 million from $5.12 million in 2012. However, the annual gift tax exclusion increases to $14,000.
A 2013 inflation adjustment comes into play for estate executors choosing the special use valuation for qualified real property. Essentially, the special use valuation allows an executor to assign a property a lower value -- and consequently a lower estate tax liability -- if its "special use" lowers its value below what would otherwise be fair market value. For 2012, executors can lower the value of property in this manner by up to $1.07 million, up $30,000 from 2012.