What's New in the Ever-Evolving U.S. Tax Code.
It’s nearly impossible to talk about taxes without remembering Benjamin Franklin’s observation: “In this world, nothing can be said to be certain, except death and taxes.”
Ben was correct, but his take on taxes does not go far enough. Not only are taxes a certainty, but changes in tax laws and rules are inescapable. Each and every year, Congress — either through action or inaction — makes changes in tax laws. Whether it’s vanishing deductions or credits that have expired or changes in rates and limits, every tax year is different. We’ve gathered some of the most significant changes that you should be aware of here.
Good News and Bad News
In the closing days of the last Congress, the Senate passed a bill that extended tax breaks that expired at the end of 2013. The bill, which was passed Dec. 16, was in effect until Dec. 31, 2014, which is good news for taxpayers who will file their 2014 income tax returns this tax season.
However, the bad news is that unless the new Congress acts, the tax breaks will not be in effect next year, which will mean a significant tax hike for most people.
This is the first year that the Affordable Care Act’s individual mandate is in effect. That means you will be required to submit proof of health insurance with your tax return.
Insurance companies and employers must provide you with documentation that shows whether you were covered for all or part of the year. The documentation will be reviewed by the IRS to determine if the coverage you had meets the requirements of the act. If you were either not covered or had inadequate coverage, the IRS will impose a penalty of $95 or 1% of your income, whichever is greater.
For taxpayers who received a subsidy to help pay for their health insurance, there is a possibility that an additional adjustment will need to be made. This is because the amount of your subsidy was based on your projected income for the year, and your tax return reflects your actual income. For example, if you projected a higher income than you actually had, an additional credit might be due.
Until this year, taxpayers who itemized their returns were allowed to deduct medical expenses that were equal to more than 7.5% of their adjusted gross income. The limit for deducting medical expenses increased this year to 10% of your adjusted gross income.
That means if your adjusted gross income was $50,000, you will need to have spent more than $5,000 for health care to deduct expenses. That amount does not include insurance premiums or expenses paid for by insurance. It only covers money you spent out of pocket.
The American Taxpayer Relief Act of 2012 made several changes to the capital gains tax rates that take effect this year. The first change is that income from qualified dividends will now be taxed at the lower capital gains rate rather than as ordinary income.
This is important because taxpayers in the 10% and 15% brackets will pay 0% on eligible dividends and nearly all capital gains. Higher-income taxpayers in the 25% and higher tax brackets will pay the 15% capital gains rate rather than their regular rate. Taxpayers in the newly added 39.6% bracket will pay 20% on capital gains.
2014 Tax Brackets
All tax brackets have increased this year in order to keep pace with inflation. Following is a comparison of last year’s tax rates compared to this year’s for individuals and married couples filing jointly.
|10%||Up to $8,925||Up to $9,075||Up to $17,850||Up to $18,150|
|15%||$8,926 – $36,250||$9,076 – $36,900||$17,851 – $72,500||$18,151 – $73,800|
|25%||$36,251 – $87,850||$36,901 – $89,350||$72,501- $146,400||$73,801- $148,850|
|28%||$87,851 – $183,250||$89,351 – $186,350||$146,401 – $223,050||$148,851 – $226,850|
|33%||$183,251- $398,350||$186,351- $405,100||$223,051- $398,350||$226,851- $405,100|
|35%||$398,351- $400,000||$405,100- $406,750||$398,351- $450,000||$405,101- $457,600|
|39.6%||More than $400,000||More than $406,750||More than $450,000||More than $457,600|
Source: Frank Addessi, The Simple Dollar