LISTING OF IMPORTANT CHANGES IN THE 2014 & 2015 TAX CODE
Tax code changes for 2014
FICA and Medicare Taxes
The current FICA tax rate is 7.65 percent. Higher-income earners might be facing an additional 0.9 percent tax, which results in an effective tax rate of 2.35 percent for single taxpayers who earn more than $200,000 and joint filers who earn more than $250,000 a year.
Self-employed taxpayers pay 15.3 percent in FICA taxes, because they don’t have an employer with which to share the cost.
These increases were due in part to the projected cost of Social Security growing faster than its income. While there will be no tax increase this year related to FICA, the wage base is slated to increase.
The wage base is the maximum amount of income that can be taxed for Social Security purposes. In 2013, the wage base was $113,700; this year, the wage base is predicted to increase to $115,500.
Exemptions and Deductions
The tax code is designed to accommodate inflation.
In 2014, these adjustments could save middle-income married couples as much as $200. Single filers will see savings, as well. Personal exemptions will also be adjusted for inflation, and limits for IRA contributions, education credits and similar benefits will increase.
Some taxpayers could still benefit from itemizing their deductions; anyone interested in doing so should discuss options and scenarios with a licensed tax professional.
The Affordable Care Act
The Patient Protection and Affordable Care Act could well be the biggest change to taxes in 2014. Employers with more than 50 full-time equivalent employees will be facing a tax penalty if they fail to provide affordable essential health coverage to their employees.
Individuals who fail to purchase coverage might also be subject to a penalty. Adults could be facing a fine of $95, while the penalty for uninsured children will be $47.50. This fine will increase annually and, by 2016, will be $695 per adult or 2.5 percent of the total household’s taxable income, whichever is greater.
On the flip side of the penalty are new tax credits and subsidies. Employers with fewer than 50 full-time employees and non-profit organizations could be eligible for tax credits if they meet the minimum coverage requirements.
Individuals will not receive tax credits but could be eligible for subsidies that help them purchase coverage through state or federal health insurance exchanges.
Many struggle to pay their student loans after graduation. In 2014, students who receive loans to fund their education will have more affordable payments that will not exceed 10 percent of their income.
Some students will be eligible to have their debts forgiven after a decade, including those who are in the military, and those who work as nurses or teachers. Other students could also be eligible for debt forgiveness after 20 years.
Tax code changes for 2015
Pell Grants, Living Expenses and Education Credits
Many students, by default, will calculate their Pell Grant funds as being used to pay for qualified education expenses, because their college applies the grant for tuition. It isn’t wrong, but that amount will decrease the expenses eligible to be used to claim an education credit like the American Opportunity Credit.
Instead, Pell Grants can now be allocated as living expenses, up to the full amount of actual living expenses — even if a student’s college actually applied the Pell Grant to his tuition and fees. The amount will then count as taxable income, but it might be worth it to maximize the education credit. This complexity affects almost 9 million students. (Note: More resources on this are forthcoming from the IRS. It’s also never a bad idea to consult with a tax professional on your specific situation, because this can get tricky.)
If you received payments this year in virtual currency, then you should include the fair market value of it with your annual income. So yes, it’s taxable. Different calculations will apply if you invest in virtual currency or receive it as compensation for services.
Saving for Health Care
Health Flexible Spending Accounts (FSAs) are traditionally use-it-or-lose-it plans. You can save pre-tax dollars to pay for health care expenses, but they must be used within a plan year. As of 2013, you are allowed to roll over $500 from an FSA into the next plan year. Now there is another change.
If you have an FSA this year and carry over $500 into 2015, you will be ineligible to participate in a Health Savings Account (HSA) in 2015. Yes, the entire year. This only applies to general purpose FSAs, not ones for specific uses like dependent care or dental expenses.
Being without a job is stressful, mentally and financially. For many job seekers, unemployment benefits provide a valuable bridge between their current situation and a new position. The bad news is that these benefits are taxable income. You will receive Form W-2 and/or Form 1099-G with the amount of benefits reported. Use this information to file your tax return.
A recent U.S. Supreme Court decision clarified that any supplemental unemployment compensation — not tied to state unemployment benefits — paid by a former employer to a laid-off employee will be taxable as wages, and therefore social security taxes will need to be withheld from them.
IRA Rollover Limits Starting in 2015
This one’s a tax change for 2015 — it won’t effect your 2014 return, but will affect your savings next year. Starting Jan. 1, 2015 you can only make one rollover from an IRA to another IRA in a 12-month period. A rollover is described as withdrawing the funds from one IRA, holding them for less than 60 days and then depositing them into another IRA account.
Taxpayers can still make as many trustee-to-trustee transfers as they like over the course of a year. (That means you can tell Bank “A” to send your IRA funds to Bank “B” — the money is never actually withdrawn and in your possession.) If you roll over more than one IRA, the withdrawals after the first will be taxed to you at regular rates, plus potentially a 10 percent early withdrawal tax. In addition, the disallowed rollover will be subject to the regular IRA contribution limits. If the rolled over amount exceeds your allowable IRA contribution, it will be treated as an excess contribution and subject to a 6 percent excise tax. The takeaway: Withdraw IRA funds with great care and attention in 2015 and going forward.
Most of the time the phrase “foster care” conjures an image of a child being placed with a family, unrelated to them, for temporary care. While that is a correct impression, for tax purposes the definition is now a bit broader. If you provide non-skilled medical support services or care for a person, living in your home, who has physical, mental or emotional issues, and you receive payments from the state or certified Medicaid provider, those payments can likely be excluded from your taxable income. Even if the person is related to you.
They aren’t big changes, but some of the fundamental parts of tax filing have undergone inflation adjustments for 2014. You are now in the highest 39.6% tax bracket if your adjusted gross income is more than:
$228,800 for married filing separately
$406,750 for single
$432,200 for head of household
$457,600 for married filing jointly
The standard deduction amounts have also increased a bit. Single or married filing separately is now $6,200, a $100 increase from 2013. Head of household is $9,100, a $150 increase. Married filing jointly or qualifying widow(er) is $12,400, a $200 increase. These will be higher if you are over 65 years old, or if you are blind.
Finally, each exemption claimed in 2014 is $3,950, a $50 increase.
There were 55 tax benefits extended in the American Taxpayer Relief Act of 2012 that expired on December 31, 2013. That means if you filed your 2014 tax return today, you would not be able to claim any of those benefits. Of course, you won’t file your 2014 return today. It isn’t due until April 15, 2015! And it is possible that Congress will choose to extend some, or all, of the tax breaks from ATRA 2012 before that time. Of the expired benefits, 12 impact individuals and 14 affect small businesses. They include:
The higher education tuition deduction, which allowed taxpayers to deduct between $2,000 and $4,000 of qualified tuition expense.
Energy credits, which included credits for home improvements that benefitted energy efficiency like heating and cooling systems, insulation and windows.
Educator expense deduction, which allows teachers to claim up to $250 of unreimbursed classroom expenses.