A lot of tax payer will be surprised by some of the new tax penalties as well as the expiration or past tax breaks, this year.
Here is what many of your have to look forward to:
First, the top tax rate for taxpayers is now 39.6%. We haven’t seen those kind of rates in almost 15 years. Those Bush-era tax cuts have finally expired, giving us the 20th century tax rates (gosh, that sounds really, really old). How high will it go? The 39.6% tax rate kicks in at $400,000 for individual taxpayers and $450,000 for married couples filing jointly.
The limitation for itemized deductions – the Pease limitations, named after former Rep. Don Pease (D-OH) – claimed on individual returns for tax year 2014 will begin with incomes of $254,200 or more ($305,050 for married couples filing jointly). The Pease limitations were slated to be reduced beginning in 2006 and eliminated in 2010; as with the other tax cuts, the elimination was extended through the end of 2012. The limitations were brought back in 2013 at the original thresholds, indexed for inflation. The limitation reduces itemized deductions by 3% of the amount by which your adjusted gross income (AGI) exceeds those thresholds, up to a maximum reduction of 80%. That’s a complicated way of saying that your deductions are limited as your income increases.
Kind of a “tag along” provision is the personal exemption phaseout (PEP). Phase-outs for PEP in 2014 begin with AGI of $254,200 for individuals and $305,050 for married couples filing jointly; the personal exemptions phase out completely at $376,700 for individual taxpayers ($427,550 for married couples filing jointly).
It’s not just higher income taxpayers who will feel a difference: taxpayers who are affected by the Affordable Care Act could also feel the pain in 2014. If you do not have health insurance in 2014 – and you don’t otherwise meet certain exemptions – you’re going to have to pay up. The Internal Revenue Service calls it a “shared responsibility payment.” Other folks call it a penalty. Still others call it a tax or a fee. No matter what you call it, if you don’t have health insurance and don’t otherwise meet certain provisions, you’ll have to cough up either 1% of your taxable income or a flat fee of $95 per uninsured adult and $47.50 per child (up to $285 for a family), whichever amount is higher. But don’t fret just yet: the penalty is due when you file your 2014 tax return in April 2015. By then, you’ll be paying even more: the flat fee increases to $325 in 2015 and $695 in 2016. Ouch.
There is some good news. The self-employed get something of a break in 2014: there is an option to claim a new, simplified deduction for a home office. The deduction is equal to $5/square foot of home office space – up to a maximum of 300 square feet. It’s an easy calculation ($5 x the number of square feet) and beats figuring out your own expenses and pro-rating them though that’s still an option if that works out better for you. The per square foot calculation is intended to save hours more than dollars. The deduction made its first appearance in 2013 but you can also take the deduction in 2014.
2014 also has the distinction of ushering in new Foreign Account Tax Compliance Act (FATCA) deadlines. Among them, FATCA withholding on new accounts will become effective July 1, 2014. That reflects a six-month delay from the previous January 1, 2014, deadline. 2014 will also mark deadlines for the completion of new due diligence and registration requirements – bound to cause confusion and irritation for international taxpayers. Since the FATCA rollout has been far from smooth to date, expect more FATCA news as the year passes.
It is good to remember that 55 different tax breaks expired at the end of 2013 and many will see the ramifications of it when filing taxes this year as well as next. Congress is even thinking about reinstating some of the more popular tax deductions.
Which popular tax deductions do you hope to see make a come back as soon as possible?
Image Source: 401(K) 2012 on Flickr
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