Individuals
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 ($250,00 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
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