New Tax Rules for 2014

Washington, D.C.

Dear Client:
  2014 starts with one set of tax rules. But changes are coming. Lawmakers decided to allow dozens of tax breaks to expire after 2013, and most of them likely won’t be retroactively revived until late 2014. They include the R&D tax credit, the deduction for state sales tax in lieu of income tax, and the exclusion of up to $2 million of forgiven debt on a debtor’s primary home. Also the ability of folks who are 70½ and older to make direct distributions of up to $100,000 annually from their IRAs to charity. For now, we’ll turn to 2014’s new tax rules. 

  A health reform change tops the list: Individuals without insurance owe a tax. Although the Obama administration delayed to 2015 the requirement that employers with 50 or more full-time workers provide employees with affordable health coverage or pay a stiff fine, the 2014 starting date for the individual mandate wasn’t deferred. Folks must have qualifying coverage for themselves and their dependents to avoid the tax. This includes, for example, health coverage provided by an employer that meets minimum federal requirements, coverage purchased through an exchange and federal coverage such as Medicare, Medicaid, Tricare and veterans coverage.

  Individuals for whom coverage is too expensive are exempt from the tax. Employees whose share of premiums exceeds 8% of the household’s AGI won’t be hit. Ditto for people ineligible for employer coverage if the cost of a basic bronze-level plan in an exchange, less any tax credit for buying insurance, exceeds 8% of household AGI. Also exempt: Filers without coverage for periods of less than three months. And people who can show that a hardship forced them to go without coverage, including folks whose insurance was canceled and who can’t buy an affordable policy.

  The tax for being uninsured is normally the higher of two amounts: The basic penalty or an income-based levy. The basic penalty is $95 a person ($47.50 for each family member who is under the age of 18), with a ceiling of $285. The income-based penalty is 1% of the excess of the taxpayer’s household AGI over the minimum level of AGI needed to trigger filing a return…$10,150 for singles and $20,300 for couples, plus $3,950 per dependent. The tax is lowered proportionally for any months the taxpayer had coverage. The levies will be higher in 2015 and 2016. But in no case can the tax exceed the cost of a bronze-level exchange plan for the taxpayer and family members, also adjusted for months with health coverage. IRS has limited remedies to collect this tax. It cannot use liens or levies, so it can only offset tax refunds. Nor can it charge interest on the unpaid balance.

  Lower-incomers get a refundable tax credit to help them afford coverage. They can elect to have the credit sent directly to an exchange to help pay premiums or take the credit on their returns. The credit is allowed on a sliding scale for filers with household income over $11,490 for singles and $23,550 for a family of four. It ends as household income hits $45,960 for singles and $94,200 for a family of four.

SOCIAL SECURITY:  The Social Security wage base increases this year to $117,000, up $3,300 from the cap for 2013. The tax rate imposed on employers and employees remains 6.2%, and the employer’s share of Medicare tax stays at 1.45% of all pay. The employee’s share is 1.45%, but the 0.9% Medicare surtax kicks in for singles with wages exceeding $200,000 and couples earning over $250,000. The surtax doesn’t affect the employer’s share. Self-employeds are also subject to the surtax. Social Security benefits rise just 1.5% in 2014, due to low inflation. The earnings limits are heading up, too. People who turn 66 this year do not lose any benefits if they make $41,400 or less before they reach that age. Individuals between ages 62 and 66 by the end of 2014 can make up to $15,480 before they lose any benefits. There’s no earnings cap once a beneficiary turns 66. The amount needed to qualify for coverage climbs to $1,200 a quarter. So earning $4,800 anytime during 2014 will net the full four quarters of coverage. And the threshold for the nanny tax rises to $1,900 this year, a $100 boost.

MEDICARE:  The basic Medicare Part B premium remains $104.90 per month in 2014. But upper-income seniors still have to pay higher Part B and D premiums if their modified adjusted gross income for 2012 exceeded $170,000 for couples or $85,000 for single people. Modified AGI is AGI plus any tax-exempt interest, EE bond interest that’s used for education and excluded foreign earned income. The Part B surcharge for 2014 won’t change, and the Part D add-on will rise slightly. The total surcharges on upper-incomers can be as large as $300.10 a month.

MEDICALS:  The annual caps on deductible contributions to HSAs inch up this year. The ceilings rise slightly to $6,550 for account owners with family coverage and to $3,300 for self-only coverage. Folks born before 1960 can put in $1,000 more. The limits on out-of-pocket costs, such as deductibles and copayments, will increase to $12,700 for people with family coverage and to $6,350 for individual coverage. Minimum policy deductibles will stay at $2,500 for families and $1,250 for singles. The limits on deducting long-term-care premiums are a tad higher. Taxpayers who are age 71 or older can write off as much as $4,660 per person. Filers age 61 to 70…$3,720. Those who are 51 to 60 can deduct up to $1,400. Individuals age 41 to 50 can take $700. And people age 40 and younger…$370. Also, the limit for tax free payouts under such policies increases to $330 a day.

FRINGE BENEFITS:  U.S. taxpayers working abroad have a slightly larger exclusion…$99,200. But the caps on transit passes and commuter vans fall sharply this year to $130 a month…bad news for those who use public transportation to get to work. Meanwhile, the monthly limitation on tax free parking goes up to $250. 

EDUCATION:  The income caps are higher for tax free EE bonds used for education. The exclusion starts phasing out above $113,950 of AGI for married couples
and $76,000 for singles. It ends when AGI hits $143,950 and $91,100, respectively. The student loan interest deduction begins to phase out at higher levels, beginning when AGI exceeds $130,000 for couples and $65,000 for single filers. The lifetime learning credit also starts phasing out at higher income levels… from $54,000 to $64,000 of AGI for singles and $108,000 to $128,000 for couples.

ADOPTION:  The adoption credit can be taken on up to $13,190 of costs, a $220 boost. If the credit is more than a filer’s tax liability, the excess is not refundable. The full $13,190 credit is available for a special needs adoption, even if it cost less. The credit starts to dry up for filers with AGIs over $197,880 and ends at $237,880. The exclusion for company-paid adoption aid also increases to $13,190.

PERSONAL TAXES:  This year’s income tax brackets are a tad wider than those for 2013, because of an increase in inflation during the 12-month period that’s used to figure the adjustments. The tax rates for this year didn’t change.

Marrieds: If taxable income is                                             The tax is
Not more than $18,150                                                         10% of taxable income
Over $18,150 but not more than $73,800                               $1,815.00 + 15% of excess over $18,150
Over $73,800 but not more than $148,850                             $10,162.50 + 25% of excess over $73,800
Over $148,850 but not more than $226,850                           $28,925.00 + 28% of excess over $148,850
Over $226,850 but not more than $405,100                           $50,765.00 + 33% of excess over $226,850
Over $405,100 but not more than $457,600                           $109,587.50 + 35% of excess over $405,100
Over $457,600                                                                     $127,962.50 + 39.6% of excess over $457,600
Singles: If taxable income is                                               The tax is
Not more than $9,075                                                          10% of taxable income
Over $9,075 but not more than $36,900                                $907.50 + 15% of excess over $9,075
Over $36,900 but not more than $89,350                              $5,081.25 + 25% of excess over $36,900
Over $89,350 but not more than $186,350                            $18,193.75 + 28% of excess over $89,350
Over $186,350 but not more than $405,100                           $45,353.75 + 33% of excess over $186,350
Over $405,100 but not more than $406,750                           $117,541.25 + 35% of excess over $405,100
Over $406,750                                                                     $118,118.75 + 39.6% of excess over $406,750
Household heads: If taxable income is                                 The tax is
Not more than $12,950                                                         10% of taxable income
Over $12,950 but not more than $49,400                               $1,295.00 +15% of excess over $12,950
Over $49,400 but not more than $127,550                             $6,762.50 + 25% of excess over $49,400
Over $127,550 but not more than $206,600                            $26,300.00 + 28% of excess over $127,550
Over $206,600 but not more than $405,100                            $48,434.00 + 33% of excess over $206,600
Over $405,100 but not more than $432,200                            $113,939.00 + 35% of excess over $405,100
Over $432,200                                                                      $123,424.00 + 39.6% of excess over $432,200

  Standard deductions for 2014 rise a bit. Marrieds get $12,400. If one spouse is age 65 or older…$13,600. If both are…$14,800. Singles can claim $6,200…$7,750 if they’re 65. Household heads get $9,100 plus $1,550 more once they reach age 65. Blind people receive $1,200 more ($1,550 if unmarried and not a surviving spouse). High-incomers lose their itemized deductions above a higher level for 2014. Their write-offs are slashed by 3% of the excess of AGI over $254,200 for singles, $279,650 for household heads and $305,050 for marrieds. But the total reduction can’t exceed 80% of itemizations. Medicals, investment interest, casualty losses and gambling losses (to the extent of winnings) are exempted from this cutback. Personal exemptions increase to $3,950 for filers and their dependents. However, this write-off is phased out for upper-incomers. It is trimmed by 2% for each $2,500 of AGI over the same thresholds for the itemized deduction phaseout.

  The 20% top rate on dividends and long-term gains starts at a higher level for 2014…singles with taxable income above $406,750, household heads over $432,200 and joint filers above $457,600. The 3.8% Medicare surtax boosts the rate to 23.8%. The regular 15% maximum rate applies for filers with incomes below these amounts, except that filers in the 10% or 15% income tax bracket still get the special 0% rate.

MINIMUM TAX:  AMT exemptions are increasing for 2014. They jump to $82,100 for couples and $52,800 for both singles and heads of household. The phaseout zones for the exemptions start at higher income levels as well…above $156,500 for couples and $117,300 for single filers and household heads. Also, the 28% AMT tax bracket kicks in a little later in 2014…above $182,500 of alternative minimum taxable income.

ESTATE & GIFT TAX:  The estate and gift tax exemption for 2013 ticks upward to $5,340,000. The rate remains 40%. The gift tax exclusion stays at $14,000 per donee. Up to $1,090,000 of farm or business realty can receive discount estate tax valuation. And more estate tax qualifies for an installment payment tax break. If one or more closely held businesses make up greater than 35% of an estate, as much as $580,000 of tax can be deferred, and IRS will charge only 2% interest.

RETIREMENT PLANS:  Several dollar ceilings on retirement plans are heading up this year: The payin limitation for defined contribution plans increases to $52,000. That’s a $1,000 hike for Keogh plans, profit sharing plans and similar arrangements. Retirement plan contributions can be based on up to $260,000 of salary. And the benefit limit for pension plans is rising to $210,000 in 2014. The income ceilings on Roth IRA payins go up. Contributions phase out at AGIs of $181,000 to $191,000 for couples and $114,000 to $129,000 for singles.

SAVINGS PLAN:  The deduction phaseouts for payins to regular IRAs start at higher levels, from AGIs of $96,000 to $116,000 for couples and $60,000 to $70,000 for singles. If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse begins at $181,000 of AGI and finishes at $191,000. And the partial credit for retirement plan payins phases out at higher levels. For marrieds…at AGIs over $60,000. Household heads…$45,000. Singles…$30,000. Several key items won’t change. The 401(k) payin limit remains $17,500. Folks born before 1965 can put in an extra $5,500. Ditto for 403(b) and 457 plans. The ceiling on SIMPLEs stays $12,000…$14,500 for folks age 50 or older this year. Payin caps for IRAs and Roths remain $5,500 plus $1,000 more for anyone 50 and up.

BUSINESS TAXES:  The standard mileage rate declines to 56¢ per mile for business driving, down half a cent from 2013. The rate for medical travel and moving also falls, to 23.5¢ a mile. But the allowance for charitable driving is unchanged…14¢ a mile. Users of the standard mileage rate can also claim the cost of parking and tolls. The tax credit for small firms that offer health coverage is juicier for 2014. The top credit rises to 50% (35% for tax-exempt groups) of the lesser of what they pay for employee coverage bought via an exchange or the average group exchange premium for small businesses in their state. However, the full credit is available only to firms with 10 or fewer full-time-equivalent employees and average wages of $25,400 or less. It falls rapidly for firms with more employees and higher pay, completely phasing out for businesses with more than 25 workers or average pay in excess of $50,800. Employers must contribute at least 50% toward the cost of coverage to get the credit. Only $25,000 of business assets can be expensed, as the law now reads, and the $25,000 phases out once more than $200,000 of assets are put in service. 50% bonus depreciation has ended. Congress allowed it to lapse after 2013. Ditto for several other business tax breaks: The work opportunity tax credit for hiring disadvantaged workers. 15-year depreciation for restaurant renovations and leasehold improvements. And the R&D tax credit, as we noted on page 1. A bill to reinstate these provisions sits atop Congress’ to-do list for 2014. Tax reform is there, too, as lawmakers continue to lay the groundwork. We’ll watch the debate closely and report to you on any developments.
Yours very truly,

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