A Guide to
2014 Tax Law Changes
(& More)
While 2014 has not brought momentous changes to federal tax laws, there are many alterations and COLAs worth noting. In particular, the Affordable Care Act has prompted a few significant changes.
Additionally, a host of tax provisions created during the recession expired at the end of last year. Some were scheduled to sunset at the end of 2012, but were extended. Their reinstatement for 2014 is left to Congress.
The 2013 federal government shutdown affected the start of the 2014 tax season.
* On January 13, the IRS began accepting Form 1120/1120S, Form 1065, and payroll and excise tax returns (Form 720, Form 940, Form 941 and Form 2290) from corporations and partnerships.
* On January 31, the IRS will begin accepting Form 1040 and Form 1041 from individuals, unincorporated small businesses, and estates and trusts.1
A reminder: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.
Tax Changes Related to Health Care Reform
1 U.S. citizens & legal residents will face a tax penalty if they go without health insurance coverage for 2014 (with some exceptions).
This 2014 penalty is minor, and its impact will be felt in 2015.
This year, American citizens and legal U.S. residents who can afford health care coverage but elect not to buy it will be hit with a tax penalty called the individual shared responsibility payment. No one will have to make this payment until April 2015.2
For 2014, the penalty for uninsured adults is $95 per person or 1% of your yearly income, whichever is greater. The penalty for uninsured children in your household is $47.50. The total household penalty is capped at $285 in 2014 (or 300% of the individual adult penalty).2,3
Next year, the adult penalty rises to $325 per person or 2.0% of yearly income; it is supposed to max out at $695/2.5% in 2016.2,3
If you are a very wealthy individual who doesn’t buy health insurance in 2014, you get something of a break when it comes to the percentage-of-income penalty, which is calculated using your modified adjusted gross income (MAGI): the maximum individual penalty cannot surpass the national average annual premium for a bronze plan. That amount will be calculated this year, but will likely be in the vicinity of $4,500-5,000.3
How will the federal government know if you lack health care coverage? You will let them know as you file your federal taxes next year. The plan is for taxpayers to send in a supplemental form with their 1040s, indicating whether or not they were insured for 2014. If you weren’t insured for 2014, the IRS will deduct the penalty amount from your federal tax refund. If you don’t get a federal tax refund for TY 2014, then the IRS will reduce your TY 2015 refund by that amount, or your TY 2016 refund if you don’t get a TY 2015 refund, and so forth.2,3
At this juncture, it appears this is the only way the IRS can assess the penalty. It can’t put a lien on the money to collect payment.4
Could you be exempt from the penalty? To see if you are, visit healthcare.gov/exemptions. The list of exemptions is quite long.2
A reminder: if you are still uninsured and want to buy health insurance for 2014, you must do so before April. March 31 is the deadline for this year’s open enrollment period. If you miss that deadline, you will have to wait until October 7 for the chance to buy coverage.2,4
2 Some enrollees in qualified health plans offered through the Health Insurance Marketplace will get tax credits.
These rules apply to 2014 & subsequent tax years.
If you enroll in a qualified health plan through the federal health insurance exchange or a state health insurance exchange, you might be eligible for the Advance Premium Tax Credit – a credit that can be applied to reduce the cost of monthly health insurance premiums.
You can choose how much of the advance credit payments you want to apply to your premiums per month. If your advance payments for a year exceed the amount of the credit you are given for the year, you are looking at a refund. If they exceed the cost of the premiums, you will have to repay the excess payments made on your behalf when you file your 2014 federal taxes.5
Generally speaking, you qualify for a credit if your household income falls into one of these per-household-size ranges, which were 2013 estimates and may be adjusted slightly north this year:
$11,490-45,960 for individuals
$15,510-62,040 for a family of 2
$19,530-78,120 for a family of 3
$23,550-94,200 for a family of 4
$27,570-110,280 for a family of 5
$31,590-126,360 for a family of 6
$35,610-142,440 for a family of 7
$39,630-158,520 for a family of 8
Consumers learned whether or not they were eligible for a credit at the website of the health insurance exchange applicable to their state (or by speaking to its personnel via phone).5
By the way, if you have enrolled in a qualified health plan through a health insurance exchange, the reimbursement or direct payment of the plan premiums counts as a qualified benefit under a cafeteria plan in 2014 and years that follow.6
3 It is now possible to carry over some FSA funds to the next year.
An exception to the use-it-or-lose-it rule has been created.
If you participate in an employer-sponsored flexible spending account (FSA) plan, you know the drill: use the money in the FSA for qualifying medical expenses by the end of the plan year, because it will be gone next year.
IRS Notice 2013-71 creates a new wrinkle. Employers sponsoring FSA programs may now allow as much as $500 in unused FSA funds to be carried over to a subsequent year by a plan participant. Whatever amount is carried over doesn’t cut into the $2,500 contribution limit for the subsequent year.
Some FSA plans have allowed participants an extra 2½ months after the end of a plan year to spend their FSA money. The new carryover rule renders this “grace period” obsolete.7
4 Large-employer reporting & responsibility requirements of the Affordable Care Act will not take effect until January 1, 2015.
Big businesses & insurers get a 1-year reprieve from these mandates.
Much has been written about this already, but here’s a brief recap. Most large employers with at least 50 full-time employees would have been required to provide basic health care coverage to FTEs or pay penalties starting in 2014, but this requirement has been delayed until January 1, 2015.
There was also an information reporting mandate scheduled for 2014, by which these employers (and by extension, insurers) would have needed to supply details of the coverage to the IRS and individuals. This, too, has been delayed until January 1, 2015.
There was no 1-year postponement of the W-2 reporting requirements linked to the ACA; these are already in effect.7
5 A new excise tax is hitting insurers.
There will almost certainly be consumer impact.
The federal government is now charging health insurance providers an aggregate flat fee each year. The fee – estimated to start at $8 billion for 2014, estimated to climb to $14.3 billion by 2018 – will be broken down per health care provider based on their premium trend. The Congressional Budget Office thinks the tariff will be “largely passed through to consumers in the form of higher premiums,” and larger deductibles may result as well.7,8
6 Owners of MSAs & HSAs should note new deductible and out-of-pocket expenses requirements for qualifying HDHPs.
The adjustments are small, but worth noting.
If you have a Health Savings Account (HSA) or Medical Savings Account (MSA), you must also be enrolled in a high deductible health plan (HDHP). You should be aware of the following requirements with regard to deductible limits on HDHPs this year.9
MSAs Annual Deductible Annual Limit, Out-of Pocket Expenses
Self-only coverage $2,200-$3,250 $4,350
Family coverage $4,350-$6,550 $8,000
HSAs Annual Deductible Annual Limit, Out-of Pocket Expenses
Self-only coverage $1,250 or greater $6,350
Family coverage $2,500 or greater $12,700
Tax Changes Affecting Businesses
7 Section 179 expensing is reduced; bonus depreciation is gone.
Here is why business owners bought more capital equipment before 2013 ended.
In 2014, the Section 179 expense deduction for equipment purchases is capped at just $25,000 of the initial $200,000 of business property put into service this year. The 50% bonus depreciation companies took advantage of in recent years is no more, and the accelerated deduction for qualified real property in the year of purchase is gone too.9,10
8 No more Work Opportunity Tax Credit.
This was an incentive for companies to hire.
The WOTC (and its variants) gave employers a credit for hiring veterans, recipients of supplemental Social Security benefits and Americans receiving select types of government aid. The credit varied per hire, but it was as large as 40% of allowable wages for an employee (25% of allowable wages for employees who had worked less than 400 hours for the business).10
9 Gratuities must now be treated as taxable wages.
Automatic tips may be history at many eateries.
When a large party eats at a restaurant, a gratuity is often built into the check. Prior to 2014, automatic gratuities were classified as tips. In 2012, IRS guidance let the service industry know that would soon change. Beginning this year, automatic gratuities are defined as service charges by the IRS, so they are taxable income. Practically speaking, this means a change for wait staff: instead of getting that money at the end of the night, they will get it as part of their paycheck. Darden Restaurants and Texas Roadhouse are among the players in the dining industry who have eliminated automatic gratuities this year, replacing them with suggested tip amounts on the bill.6,11
10 S-corporation relief has been extended.
The summer 2013 decision applies to many varieties of S corps.
In August, the IRS rolled out Revenue Procedure 2013-30, which unifies late-relief methods for many S-corp, ESBT, QSST, QSub and corporate classification elections. Starting this year, S-corps have up to 3 years and 75 days to request relief for eligible late elections after the intended start date of a late election.7
11 Mass transit & carpool allowances for employees have been roughly halved for 2014.
Other qualified transportation fringe benefit limits remain the same, however.
In 2013, employers could provide up to $245 a month to an employee to subsidize their commutes to work via carpools, vanpools or mass transit, and get a tax deduction as a result. In 2014, the maximum monthly subsidy is $130.
Employers may still offer employees up to $250 a month in qualified parking benefits, and reimburse workers up to $20 per month for qualified bicycle commuting.12
Tax Changes Affecting Individuals & Households
12 Two major mortgage-related tax breaks are gone.
Underwater homeowners could face major tax burdens if they sell.
The twice-extended Mortgage Forgiveness Debt Relief Act of 2007 expired at the end of 2013. It gave struggling homeowners the chance to exclude up to $2 million of forgiven home loan debt from their taxable incomes – a tax break that isn’t normally available for cancelled debts.
Mortgage debts incurred after Jan. 1, 2007 and not after Dec. 31, 2012 were eligible as long as they were secured by the taxpayer’s principal residence. Debt reduced because of mortgage restructuring qualified along with forgiven debt from foreclosures and short sales. It was a great tax break, and many are calling for the MFDRA to be restored.10,13
Another housing tax break disappeared in 2014. In 2013, homeowners paying for private mortgage insurance (PMI) who chose to itemize their deductions could write off the cost of PMI premiums plus related interest and taxes. That isn’t possible now.10
13 No more above-the-line tuition & fees deduction.
Students & families lose a prime tax break.
For 2013, an eligible taxpayer could take an above-the-line deduction for qualified educational expenses paid during the tax year. That deduction ranged from $2,000-$4,000. The opportunity is gone in 2014, though the American Opportunity Credit and the Lifetime Learning Credit remain.10,14
14 No more educator expense deduction.
Classroom teachers will miss this one.
Last year, educators employed by eligible primary or secondary institutions could take an above-the-line tax deduction of up to $250 for unreimbursed expenses for school and classroom-related supplies. (The deduction limit was $500 for married taxpayers filing jointly.) In 2014, it is no longer around.10,14
15 Tax-free IRA distributions to 501(c)(3)s are no longer permitted.
Wealthy IRA owners, hospitals, universities & charities are already missing this one.
The IRA charitable rollover was initially set to disappear at the end of 2011, but it was brought back by Congress in both 2012 and 2013. Some legislators called for making it permanent. This year, it is absent. The move allowed IRA owners aged 70½ or older to avoid taxation on as much as $100,000 of their Required Minimum Distributions (RMDs) if the money was transferred directly from the IRA custodian to a qualified non-profit organization.10,14
16 Two major energy-efficient home improvement credits are gone.
One was designed for homeowners, another for contractors & builders.
In 2013, taxpayers who made certain energy-saving improvements to their residences could claim a tax credit of as much as $500 to offset the cost of the upgrades. Contractors could also claim a credit for building energy-efficient homes for their clients (up to $2,000 per home). Neither perk is around for 2014.10,14
17 The electric vehicle credit is now absent.
Will this dent electric & hybrid vehicle sales?
If you bought or leased a plug-in electric car in 2013, you likely knew about the tax credit of up to $7,500 for such vehicles. (The size of the credit depended on make, model and battery pack size.) Taxpayers won’t have this option in 2014.10
18 A big tax break on donated real estate has expired.
The Enhanced Easement Tax Incentive was a boon to conservationist groups.
During the years 2006-13, individual taxpayers that donated real capital gain property or property easements to a qualified conservationist organization could take a resulting deduction as large as 50% of their adjusted gross incomes. (Qualifying farmers and ranchers could deduct up to 100% of their incomes, and S-corps and C-corps could take advantage of the tax break as well.) In addition, donors of such real estate could keep taking the deduction for an additional 15 years, up to the fair market value of the property.
In 2014, the incentive to make such real property donations is less compelling: the deduction a donor can take reverts to 30% of their AGI in the year of the donation, and the carry-forward period reverts to 5 years in addition to the year of donation.10,15
19 Less favorable rules for small business stock gains.
The basic exclusion shrinks.
As a result of the American Taxpayer Relief Act of 2012, any taxpayer besides a corporation could exclude 100% of the gain from the sale or exchange of qualified small business stock acquired between September 27, 2010 and January 1, 2014 and held for more than 5 years. In 2014, the basic exclusion reverts back to 50%; it is 60% in empowerment zones. The gain that is eligible to be taken into account for purposes of this exclusion is limited to the greater of $10,000,000 or 10 times the taxpayer’s basis in the stock (see IRS Sec. 1202(b)(1)). The limitation is computed on a per-issuer basis, with lower limits ($5,000,000) applying to married individuals filing separately.16,22
20 Depreciation caps on “executive” vehicles have diminished.
Businesses with fleets are looking at less of a tax break.
In 2013, a business that put a car, truck or SUV into service could claim $11,160 in depreciation. But, as bonus depreciation is no longer allowed in 2014, the first-year depreciation cap allowed by IRC Section § 280F is now back to $3,160.17,18
21 The standard mileage rate has fallen to $0.56.
The decline is minimal, however.
In 2014, the optional mileage allowance for business use of owned or leased vehicles is $0.56 per mile, down half a cent from 2013.9
COLAs for 2014
22 Income tax brackets receive the usual minor adjustment.
These income thresholds define the 2014 federal income tax brackets.19
Bracket Single Filers Married Filing Jointly Married Filing Head of Household
or Qualifying Survivor Separately
10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950
15% $9,076-$36,900 $18,151-$73,800 $9,076-$36,900 $12,951-$49,400
25% $36,901-$89,350 $73,801-$148,850 $36,901-$74,425 $49,401-$127,550
28% $89,351-$186,350 $148,851-$226,850 $74,426-$113,425 $127,551-$206,600
33% $186,351-$405,100 $226,851-$405,100 $113,426-$202,550 $206,601-$405,100
35% $405,101-$406,750 $405,101-$457,600 $202,551-$228,800 $405,101-$432,200
39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more
23 The individual estate tax exemption rises to $5.34 million.
It was $5.25 million in 2013. Any unused portion of the $5.34 million individual exemption may be transferred to a surviving spouse upon the death of the first deceased spouse through a timely filing of IRS Form 706.
In the big picture, the lifetime federal estate tax exemption and the lifetime federal gift tax exemption are unified, so an individual can also elect to use some or all of a $5.25 million individual exemption on gifts made during his or her lifetime (though that will lower the amount of his or her estate that may be excluded from inheritance taxes).
Incidentally, the annual gift tax exclusion amount remains at $14,000 this year.20
24 The standard deduction is slightly greater.
Here are the amounts for 2014.19
Single filers, married filing separately $6,200 (up $100 from 2013)
Head of household $9,100 (up $150 from 2013)
Married filing jointly/qualifying survivor $12,400 (up $200 from 2013)
25 The personal exemption rises by $50.
In 2013, it was $3,900; in 2014, it is $3,950. Here are the 2014 phase-out ranges…19,21
Single filers, married filing separately $254,200-$376,700
Head of household $279,650-$402,150
Married filing jointly/qualifying survivor $305,050-$427,550
26 The AMT exemption amount has risen for 2014.
As the Alternative Minimum Tax was at last indexed for inflation at the start of 2013, exemption amounts are set as follows:
Single filers $52,800
Married filing separately $41,050
Married filing jointly/qualifying survivor $82,100
These amounts are a few hundred dollars higher than in 2013.19,21
27 Social Security’s taxable wage base is $3,300 higher in 2014.
This year, the FICA tax rate is 6.2% on the first $117,000 of wages paid to an employee. So an employee whose 2014 wages total $117,000 will pay $7,254 to Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program this year with the employer contributing an equivalent amount. (This tax rate is 12.4% for self-employed individuals).22
28 Phase-outs of itemized deductions get a COLA.
The Pease limitations returned in 2013 after a 2-year absence. These are thresholds that cut into the value of most itemized deductions above a certain AGI level. Here is where the Pease limitations are set for 2014.19,21
Single filers $254,200
Head of household $279,650
Married filing jointly/qualifying survivor $305,050
29 Phase-out ranges for the above-the-line student loan interest deduction have been adjusted.
The deduction limit remains at $2,500 this year; the phase-out ranges are $5,000 north of where they were in 2013.17
Single filers, heads of household $65,000-80,000
Married filing jointly/qualifying survivor $130,000-160,000
30 Earned Income Tax Credit limits rise.
This tax break is designed to help low-wage filers. The credit varies based on a) your taxable income, b) the number of dependents you support. For 2014, you are eligible to receive it providing your earned income and your AGI each fall below the following limits:
$46,997 ($52,427 married filing jointly) with 3 or more qualifying children
$43,756 ($49,186 married filing jointly) with 2 qualifying children
$38,511 ($43,941 married filing jointly) with 1 qualifying child
$14,590 ($20,020 married filing jointly) with no qualifying children
The corresponding EITC for TY 2014:
$6,143 with 3 or more qualifying children
$5,460 with 2 qualifying children
$3,305 with 1 qualifying child
$496 with no qualifying children
If you have investment income exceeding $3,350 for 2014, you can’t qualify for the EITC.23
31 Some minor COLAs affect traditional & Roth IRA contributions.
While the amount you can contribute to a single traditional or Roth IRA or across multiple IRAs in 2014 is unchanged from last year – $5,500, $6,500 for those 50 and older – some other changes have occurred pertaining to the ability to contribute to a Roth or take a tax deduction from a “regular” IRA.
Phase-out ranges affecting the tax deduction for traditional IRA contributions (AGI).
Single or head of household, contributing to workplace retirement plan & traditional IRA $60,000-70,000
Married couple both contributing to workplace retirement plan & traditional IRA $96,000-116,000
Married individual contributing to traditional IRA, spouse in workplace retirement plan $181,000-191,000
These phase-out ranges are $3,000 higher for investors who don’t have a workplace retirement plan but are married to someone who does, and $1,000 higher for the others.24
Phase-out ranges affecting the chance to make a Roth IRA contribution (AGI).
Single or head of household $114,000-129,000
Married couples $181,000-191,000
These phase-out ranges have increased by $2,000 for single filers and by $3,000 for couples.24
32 New COLAs pertaining to SEPs, ESOPs, top-heavy plans & defined contribution plans.
Slight 2014 adjustments have been made to some thresholds for these plans.25
SEPs Maximum compensation of $260,000 (up $5,000 from 2013)
ESOPs 5-year distribution threshold of $1,050,000 (up $15,000 from 2013)
Additional year threshold of $210,000 (up $5,000 from 2013)
Top-heavy plans $ limit defining key employee rises to $170,000 (up $5,000 from 2013)
415(c)(1)(a) plans Maximum annual benefit of $52,000 (up $1,000 from 2013)
(defined contribution plans)
33 Saver’s credit thresholds are a bit higher.
The saver’s credit available to IRA and 401(k) account holders whose AGI falls underneath a certain limit, and millions of people claim it each year. It can be as large as $1,000 for single filers and as large as $2,000 for married couples. For 2014, the AGI limits for claiming the saver’s credit are:
Single filers ≤ $30,000 (up $500 from 2013)
Head of household ≤ $45,000 (up $750 from 2013)
Married filing jointly/qualifying survivor ≤ $60,000 (up $1,000 from 2013)
Saver’s credits seldom approach the $1,000/$2,000 maximums, but they are certainly welcomed by low-income and moderate-income pre-retirees.24
34 The adoption tax credit has increased.
This very large credit is available to anyone who adopts a child under 18 years of age or a physically or mentally disabled child of any age. The child can be a U.S. citizen, a “resident alien,” or a “nonresident alien” as defined by the IRS. To claim the credit, you must demonstrate personal expenses as part of the adoption process (but see the exception below). The credit is commonly claimed by families in the year an adoption is finalized.
In 2014, the adoption tax credit is $13,190 per child, up from $12,970 last year. While the credit is subject to phase-outs (the MAGI phase-out range for 2014 is $197,880-237,880), any family that adopts a special needs child (as defined in the IRC) will qualify for the full amount of the credit even if no personal expenses are incurred in doing so.26
35 Retirement earnings test amounts for Social Security have risen.
If you receive Social Security benefits and you will be younger than full retirement age at the end of 2014, $1 of your benefits will be withheld for every $2 that you earn above $15,480 (a $360 increase from 2013).
If you receive Social Security benefits and reach full retirement age during 2014, $1 of your benefits will be withheld for every $3 that you earn above $41,400 – but that restriction applies only to earnings in the months prior to attaining full retirement age. (The applicable 2014 limit was $40,080.) There is no limit on earnings starting the month an individual attains full retirement age.
Will some of your Social Security income be taxable this year? That depends on your “combined income,” which Social Security calculates using this formula:
Adjusted gross income + non-taxable interest + 50% of Social Security benefits = combined income
If your combined income is between the following amounts, you may have to pay federal income tax on up to 50% of your benefits:
Single filers (“individuals”) $25,000-34,000
Joint filers $32,000-44,000
If it exceeds the following amounts, you may have to pay federal income tax on up to 85% of your benefits:
Single filers (“individuals”) $34,000
Joint filers $44,000
Marrieds who file separately will “probably” have their Social Security benefits taxed, according to the program’s website. The above dollar thresholds, incidentally, have never been inflation-indexed.27,28
What Hasn’t Changed in 2014
As annualized inflation has been tame, the IRS has left some yearly limits and thresholds unaltered for 2014. Here is a list of key unchanged items…9,19,24,29
Traditional/Roth IRA Contribution Limit $5,500 ($6,500 if 50 or older this year)
401(k), 403(b), TSP Contribution Limit* $17,500 ($23,000 if 50 or older this year)
SIMPLE Plan Contribution Limit $12,000 ($14,500 if 50 or older this year)
SEP Eligibility Threshold (minimum compensation amount) $550
FSA Contribution Limit $2,500
Maximum Federal Estate Tax Rate 40%
Federal Gift Tax Exclusion $14,000
“Kiddie” Tax Standard Deduction $1,000
“Kiddie” Tax Threshold (unearned income of a child) $2,000
Child Tax Credit Eligibility Threshold (earned income) $3,000
American Opportunity Tax Credit $2,500
Lifetime Learning Credit $2,000
Student Loan Interest Deduction* $2,500
*Also applies to most 457 plans
**No longer limited to interest paid during first 60 months of repayment
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and North Light Financial Services are not affiliated. Cambridge does not offer tax advice. Office of Supervisory Jurisdiction: 46 Accord Park Drive / Norwell, MA 02061 Phone: 781-878-4063
This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. Both «representativename» and MarketingLibrary.Net, Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Neither «representativename» nor MarketingLibrary.Net, Inc. assume any obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.
Citations.
1 – irs.gov/uac/Newsroom/Starting-Jan.-13-2014-Business-Tax-Filers-Can-File-2013-Returns
