By David Preston, CPA
Hope you had a great Christmas and Happy New Year because . . . ready or not . . . the 2014 tax season is here! The song Who Let The Dogs Out? keeps popping into my mind for this series. Who unleashed Congress? We are facing the biggest tax act of this generation, and there are many changes for 2013 and 2014. We have the largest social program since Medicare and Medicaid. Obamacare, American Tax Relief Act is HUGE and vastly affects so much more than health care.
IRS will not process tax returns until January 31, 2014.
Individual Health Insurance Mandate: Most individuals are required to have health insurance for themselves and their dependents beginning in 2014 as a result of the Patient Protection and Affordable Care Act. 134 individuals who do not comply are subject to penalties.
Exemption from Mandate Penalty
1. Religious reasons
2. Member of Health care sharing ministry
3. Indian tribes
4. No tax return filing requirement
5. Short coverage gap (you went without coverage for less than three consecutive months). Warning: The short coverage gap only applies to the first gap.
6. Unaffordable coverage options – The minimum amount you must pay for premiums is more than 8% of your Adjusted Household Income.
8. Not a U.S. citizen, a U.S. national or an alien lawfully present in the U.S.
A taxpayer is responsible for providing health insurance coverage if they are able to claim a personal exemption for the person. This is huge; divorced couples/planning: person claiming child must provide health insurance coverage.
Immediate Action: If you do not have health insurance, you may want to consider signing up online immediately. Hardships to get out of the 2014 penalty for not having insurance include not being able to afford the insurance AND attempting to sign up and not being able to because the state requested more information (currently the deadline is 3/31/14 for information return date), system overloaded, etc.
HUGE: Taxpayers making under $92,200 married filing joint and $44,680 single, if you go with government insurance, can apply for government assistance to help pay a percentage of your health insurance. Your employer CANNOT offer you health coverage!
Individual tax deductions made retroactive and extended for 2012 and 2013:
Deduction for teachers
Mortgage debt forgiveness exclusion 2013
Exclude transit passes $240 extended
Deduct mortgage insurance premiums
Deduct state and local sales tax
Deduct qualified tuition and expenses
Tax free distribution from IRA to charity
Following tax deductions extended permanently:
• Student loan interest not limited to 60 months
• Coverdell savings allowed up to $2,000
• Employer provided education assistance up to $5,250
• Exclusion from income – certain scholarships
• Higher amounts for child and dependent care credit
Increased threshold for claiming medical on Schedule A
― From 7.5% to 10%
― Remains at 7.5% for those age 65 and older until 2016
• Medical device manufacturers and importers
― 2.3% tax is imposed on the sale of any medical device
New limit on FSA contributions
• $2,500 per year
• Medicare Part D
• Phase-in of federal subsidies for brand-name prescriptions begins
• By 2020, the discount is 75% until the catastrophic coverage kicks in
Health Care 2013 – .9% Surtax
• Additional Medicare tax on high income workers
― The tax is increased by .9% (1.45% to 2.35%) on those earning over $250,000 joint/$200,000 single
― Threshold is not indexed for inflation
― Does not impact the Medicare tax paid by the employer
― This tax will not generate an above-the-line deduction
― Employer is required to withhold on wages over $200,000
Health Care 2013 – 3.8% Medicare Tax on Net Investment Income
• The Medicare contribution tax is imposed on individuals, estates, and trusts.
• For an individual, the tax is 3.8% of the lesser of either:
1) net investment income or
2) the excess of modified adjusted gross income (MAGI) over the threshold amount.
• The threshold amount is $250,000 for joint return or surviving spouse, $125,000 for married filing separate return, and $200,000 for all others.
3.8% Medicare Tax surtax is imposed on net investment income:
Interest, dividends, royalties, rents, capital gains, non-qualified, annuities, passive income from a trade or business or income from the business of trading in commodities or financial instruments
Wages, unemployment compensation, interest on tax-exempt bonds, social security, alimony, non-taxable gain on the sale of a principal residence, non-passive trade or business income, income, Alaska Permanent Fund dividends and retirement plan distributions (Can increase MAGI though).
•This tax is in addition to the additional Medicare tax of .9%.
SIMPLIFIED Home Office Deduction new this year. Standard $5 per square foot with no depreciation deduction, yet you can deduct mortgage interest and real estate taxes on Sched. A. As always, there are advantages and disadvantages to both . . . and we should calculate both ways for the BEST deduction.
MAJOR Capitalization of Assets changes this year! Material factor of $500 is the amount you must capitalize (not the $1,000 we have used for years).
IRS has modified the “use-or-lose” rule for health flexible spending arrangements (health FSAs) in order to allow, at the plan sponsor’s option, participating employees to carry over up to $500 of unused amounts remaining at year end. Previously, any amounts that weren’t used by year end would be forfeited.
Same-Sex Couples, The Defense of Marriage Act (DOMA) IRS Current Position
• Same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes.
• This applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.”
• Rev. Rul. 2013-17
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling.
• However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.
Estate and Gift Tax
Estate tax amounts made permanent and indexed
|Year||Exemption||Max Tax Rate|
|*Indexed for inflation for 2013 & future yrs|
From the Kiplinger Tax Letter: Will expiring tax breaks be revived quickly? The odds favor later, rather than sooner. A number of popular tax provisions are set to lapse after the end of 2013. They include the R&D tax credit, the credit for producing energy from wind, the deduction for state sales tax in lieu of state income tax, and the ability of folks age 70½ and older to make direct distributions of up to $100,000 annually from their IRAs to charity. Plus the exclusion of up to $2 million of forgiven debt on a debtor’s primary home. All of these provisions have strong bipartisan backing.
There’s been recent talk of OKAYING an extension of these breaks quickly, but we haven’t detected that tax writers are inclined to take fast action. Right now, it’s more likely that the provisions will be retroactively revived near the end of 2014 (Note that higher AMT exemptions are not on the list because early this year, Congress approved a permanent fix to keep millions of taxpayers off the AMT rolls).
The 2014 standard mileage rate will fall to 56¢ per mile for business driving, down half a cent from 2013. Firms with four or less vehicles can use this rate, but each vehicle’s basis must be reduced by the depreciation component…22¢ a mile. The rate for medical travel and moving will also drop half a cent, to 23.5¢, next year. But the allowance for charitable driving will remain static at 14¢ per mile.
Of interest: Who pays taxes? The tax burden on high-incomes has fallen, according to new IRS statistics. The top 1% of all filers paid about 35.1% of all federal income taxes in 2011, the most recent year IRS has analyzed. That’s down from 37.4% the previous year. They reported 18.7% of total adjusted gross income, also lower than the year before. However, the average tax rate paid by the top 1% rose slightly to 23.5% of their AGI. Filers needed to have AGIs of at least $388,905 to qualify for the top 1% of earners.
The highest 5% paid 56.5% of total income tax and accounted for 33.9% of all adjusted gross income. They each had AGI of at least $167,728. The top 10% of filers, those with AGIs of $120,136 or more, bore 68.3% of the total tax burden while bringing in slightly more than 45% of the total adjusted gross income.
The bottom 50% of filers paid 2.9% of the total federal income tax . Their share is so low because Social Security taxes are not included in the figures and because many of them get substantial tax relief from the earned income credit.
Did you make it to the bottom of this email? Now, what do you think about Congress unleashed? Can you see why I keep hearing the song Who Let The Dogs Out?
David C. Preston, CPA, PC * 4626 E Fort Lowell Rd., Suite L * Tucson, AZ 85712 * Ph 520-881-6974