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Welcome
2014! As the new year rolls around, it's always
a sure bet that there will be changes to the
current tax law and 2014 is no different. From
health savings accounts to retirement
contributions and standard deductions, here's a
checklist of tax changes to help you plan the
year ahead.
Filing Season Delayed by 10
Days
Taxpayers
should note that the 2014 tax season opens on
Jan. 31, 2014.
In most
years, the filing season opens on Jan. 21;
however, due to the 16-day government shutdown
that took place in October 2013, the filing
season is delayed by 10 days this year. No
returns, paper or electronic, will be processed
by the IRS before this date.
The April 15
tax deadline is set by statute and will remain
in place, although taxpayers can request an
automatic six-month extension to file their tax
return. If you think you need an extension,
please let us know.
Individuals
For 2014,
more than 40 tax provisions are affected by
inflation adjustments, including personal
exemptions, AMT exemption amounts, and foreign
earned income exclusion, as well as most
retirement contribution limits.
For 2014,
the tax rate structure, which ranges from 10 to
39.6 percent, remains the same as in 2013, but
tax-bracket thresholds increase for each filing
status. Standard deductions and the personal
exemption have also been adjusted upward to
reflect inflation. For details see the article,
"Tax Brackets, Deductions, and Exemptions for
2014," below.
Alternative Minimum Tax (AMT)
Exemption amounts for the AMT, which was made
permanent by the American Taxpayer Relief Act
(ATRA) are indexed for inflation and allow the
use of nonrefundable personal credits against
the AMT. For 2014, the exemption amounts are
$52,800 for individuals ($51,900 in 2013) and
$82,100 for married couples filing jointly
($80,800 in 2013).
"Kiddie Tax"
For taxable years beginning in 2014, the amount
that can be used to reduce the net unearned
income reported on the child's return that is
subject to the "kiddie tax," is $1,000 (same as
2013). The same $1,000 amount is used to
determine whether a parent may elect to include
a child's gross income in the parent's gross
income and to calculate the "kiddie tax". For
example, one of the requirements for the
parental election is that a child's gross income
for 2014 must be more than $1,000 but less than
$10,000.
For 2014,
the net unearned income for a child under the
age of 19 (or a full-time student under the age
of 24) that is not subject to "kiddie tax" is
$2,000.
Health
Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA)
are used to pay current or future medical
expenses of the account owner, his or her
spouse, and any qualified dependent. Medical
expenses must not be reimbursable by insurance
or other sources and do not qualify for the
medical expense deduction on a federal income
tax return.
A qualified
individual must be covered by a High Deductible
Health Plan (HDHP) and not be covered by other
health insurance with the exception of insurance
for accidents, disability, dental care, vision
care, or long-term care.
For calendar
year 2014, a qualifying HDHP must have a
deductible of at least $1,250 for self-only
coverage or $2,500 for family coverage
(unchanged from 2013) and must limit annual
out-of-pocket expenses of the beneficiary to
$6,350 for self-only coverage (up $100 from
2013) and $12,700 for family coverage (up $200
from 2013).
Medical
Savings Accounts (MSAs)
There are two types of Medical Savings Accounts
(MSAs): the Archer MSA created to help
self-employed individuals and employees of
certain small employers, and the Medicare
Advantage MSA, which is also an Archer MSA, and
is designated by Medicare to be used solely to
pay the qualified medical expenses of the
account holder. To be eligible for a Medicare
Advantage MSA, you must be enrolled in Medicare.
Both MSAs require that you are enrolled in a
high deductible health plan (HDHP).
Self-only coverage. For
taxable years beginning in 2014, the term "high
deductible health plan" means, for self-only
coverage, a health plan that has an annual
deductible that is not less than $2,200 (up $50
from 2013) and not more than $3,250 (up $50 from
2013), and under which the annual out-of-pocket
expenses required to be paid (other than for
premiums) for covered benefits do not exceed
$4,350 (up $50 from 2013).
Family
coverage. For
taxable years beginning in 2014, the term "high
deductible health plan" means, for family
coverage, a health plan that has an annual
deductible that is not less than $4,350 (up $50
from 2013) and not more than $6,550 (up $100
from 2013), and under which the annual
out-of-pocket expenses required to be paid
(other than for premiums) for covered benefits
do not exceed $8,000 (up $150 from 2013).
AGI Limit
for Deductible Medical Expenses
In 2014, the deduction threshold for deductible
medical expenses remains at 10 percent (same as
2013, but up from 7.5 percent in 2012) of
adjusted gross income (AGI); however, if either
you or your spouse were age 65 or older as of
December 31, 2013, the new 10 percent of AGI
threshold will not take effect until 2017. In
other words, the 7.5 percent threshold continues
to apply for tax years 2013 to 2016 for these
individuals. In addition, if you or your spouse
turns age 65 in 2014, 2015, or 2016, the 7.5
percent of AGI threshold applies for that year
through 2016 as well. Starting in 2017, the 10
percent of AGI threshold applies to everyone.
Eligible
Long-Term Care Premiums
Premiums for long-term care are treated the same
as health care premiums and are deductible on
your taxes subject to certain limitations. For
individuals age 40 or younger at the end of
2014, the limitation is $370. Persons more than
40 but not more than 50 can deduct $700. Those
more than 50 but not more than 60 can deduct
$1,400, while individuals more than 60 but not
more than 70 can deduct $3,720. The maximum
deduction $4,660 and applies to anyone more than
70 years of age.
Medicare
Taxes
The additional 0.9 percent Medicare tax on wages
above $200,000 for individuals ($250,000 married
filing jointly), which became effective last
year, in 2013, remains in effect for 2014, as
does the Medicare tax of 3.8 percent on
investment (unearned) income for single
taxpayers with modified adjusted gross income
(AGI) more than $200,000 ($250,000 joint
filers). Investment income includes dividends,
interest, rents, royalties, gains from the
disposition of property, and certain passive
activity income. Estates, trusts and
self-employed individuals are all liable for the
new tax.
Foreign
Earned Income Exclusion
For 2014, the foreign earned income exclusion
amount is $99,200, up from $97,600 in 2013.
Long-Term
Capital Gains and Dividends
In 2014 tax rates on capital gains and dividends
remain the same as 2013 rates; however threshold
amounts are indexed for inflation. As such, for
taxpayers in the lower tax brackets (10 and 15
percent), the rate remains 0 percent. For
taxpayers in the four middle tax brackets, 25,
28, 33, and 35 percent, the rate is 15 percent.
For an individual taxpayer in the highest tax
bracket, 39.6 percent, whose income is at or
above $406,750 ($457,600 married filing
jointly), the rate for both capital gains and
dividends is capped at 20 percent.
Pease and
PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions)
and PEP (personal exemption phase-out) have been
permanently extended (and indexed to inflation)
for taxable years beginning after December 31,
2012, and in 2014, affect taxpayers with income
at or below $254,200 for single filers and
$305,050 for married filing jointly.
Estate and
Gift Taxes
For an estate of any decedent during calendar
year 2014, the basic exclusion amount is
$5,340,000, indexed for inflation (up from
$5,250,000 2013). The maximum tax rate remains
at 40 percent. The annual exclusion for gifts
also remains at $14,000.
Individuals - Tax Credits
Adoption
Credit
In 2014, a non-refundable (only those
individuals with tax liability will benefit)
credit of up to $13,190 is available for
qualified adoption expenses for each eligible
child.
Earned
Income Tax Credit
For tax year 2014, the maximum earned income tax
credit (EITC) for low and moderate income
workers and working families rises to $6,143, up
from $6,044 in 2013. The credit varies by family
size, filing status and other factors, with the
maximum credit going to joint filers with three
or more qualifying children.
Child Tax
Credit
For tax year 2014, the child tax credit is
$1,000 per child.
Child and
Dependent Care Credit
If you pay someone to take care of your
dependent (defined as being under the age of 13
at the end of the tax year or incapable of
self-care) in order to work or look for work,
you may qualify for a credit of up to $1,050 or
35 percent of $3,000 of eligible expenses in
2014. For two or more qualifying dependents, you
can claim up to 35 percent of $6,000 (or $2,100)
of eligible expenses. For higher income earners
the credit percentage is reduced, but not below
20 percent, regardless of the amount of adjusted
gross income.
Individuals - Education
American
Opportunity Tax Credit and Lifetime Learning
Credits
The American Opportunity Tax Credit (formerly
Hope Scholarship Credit) was extended to the end
of 2017 by ATRA. The maximum credit is $2,500
per student. The Lifetime Learning Credit
remains at $2,000 per return.
Interest on
Educational Loans
In 2014 (as in 2013), the $2,500 maximum
deduction for interest paid on student loans is
no longer limited to interest paid during the
first 60 months of repayment. The deduction is
phased out for higher-income taxpayers with
modified AGI of more than $65,000 ($130,000
joint filers).
Individuals - Retirement
Contribution
Limits
The elective deferral (contribution) limit for
employees who participate in 401(k), 403(b),
most 457 plans, and the federal government's
Thrift Savings Plan remains unchanged at
$17,500. Contribution limits for SIMPLE plans
remains unchanged at $12,000. The maximum
compensation used to determine contributions
increases to $260,000 (up $5,000 from 2013).
Income
Phase-out Ranges
The deduction for taxpayers making contributions
to a traditional IRA is phased out for singles
and heads of household who are covered by an
employer-sponsored retirement plan and have
modified AGI between $60,000 and $70,000, up
from $59,000 and $69,000 in 2013.
For married
couples filing jointly, in which the spouse who
makes the IRA contribution is covered by an
employer-sponsored retirement plan, the
phase-out range is $96,000 to $116,000, up from
$95,000 to $115,000. For an IRA contributor who
is not covered by an employer-sponsored
retirement plan and is married to someone who is
covered, the deduction is phased out if the
couple's modified AGI is between $181,000 and
$191,000, up from $178,000 and $188,000.
The modified
AGI phase-out range for taxpayers making
contributions to a Roth IRA is $181,000 to
$191,000 for married couples filing jointly, up
from $178,000 to $188,000 in 2013. For singles
and heads of household, the income phase-out
range is $114,000 to $129,000, up from $112,000
to $127,000. For a married individual filing a
separate return who is covered by a retirement
plan, the phase-out range remains $0 to $10,000.
Saver's
Credit
In 2014, the AGI limit for the saver's credit
(also known as the retirement savings
contribution credit) for low and moderate income
workers is $60,000 for married couples filing
jointly, up from $59,000 in 2013; $45,000 for
heads of household, up from $44,250; and $30,000
for married individuals filing separately and
for singles, up from $29,500.
Businesses
Standard
Mileage Rates
The rate for business miles driven is 56 cents
per mile for 2014, down from 56.5 cents per mile
in 2013.
Section 179
Expensing
For 2014 the maximum Section 179 expense
deduction for equipment purchases decreases to
$25,000 of the first $200,000 of business
property placed in service during 2014. The
bonus depreciation of 50 percent is gone, as is
the accelerated deduction, where businesses can
expense the entire cost of qualified real
property in the year of purchase.
Transportation Fringe Benefits
If you provide transportation fringe benefits to
your employees, in 2014 the maximum monthly
limitation for transportation in a commuter
highway vehicle as well as any transit pass is
$130 down from $245 in 2013. The monthly
limitation for qualified parking is $250.
While this
checklist outlines important tax changes for
2014, additional changes in tax law are more
than likely to arise during the year ahead.
Don't
hesitate to call us if you want to get an early
start on tax planning for 2014. We're here to
help!
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