The following are select tax topics affecting individuals and businesses for tax year 2014. Several issues of significance to individuals and businesses for 2013 remain relevant for 2014 and are noted below. The impact of select new topics below, such as individual and business impacts of the Affordable Care Act, are discussed in great depth.
Top Tax Rates
Single filers with taxable incomes exceeding $406,750 ($457,600 for married taxpayers filing jointly) are subject to the top tax rate of 39.6 percent.
Net Investment Income Tax
Since the net investment tax has been in existence only since the 2013 tax year, continued discussion is warranted. The net investment income tax, or NIIT, applies to individual, trust and estate income tax returns and is 3.8 percent of the lesser of two amounts: net investment income, or the excess of the taxpayer's modified adjusted gross income (MAGI) above $200,000 (single filer) or $250,000 (joint filer). Net investment income includes three broad categories: interest, dividends, annuity, royalty and rental income; net income from a business in which the taxpayer does not materially participate; and business income from trading in financial instruments or commodities, as well as capital gains and other net gains from the sale of investment or passive property. Items excluded from net investment income include, but are not limited to, distributions from certain qualified retirement plans and individual retirement accounts, and municipal bond interest.
Additional Medicare Taxes
An additional (and also relatively new) 0.9-percent Medicare tax applies to FICA wages and self-employment income exceeding $200,000 for single taxpayers, $250,000 for joint filers and $125,000 for married taxpayers filing separately. This is in addition to the existing Medicare tax of 1.45 percent on all earned income and Social Security tax of 6.2 percent on earned income up to $117,000 for 2014.
Capital Gains Tax Rate
The maximum tax rate for long-term gains is 20 percent for taxpayers in the highest tax bracket (39.6 percent), remains at 0 percent for taxpayers below the 15-percent bracket and remains at 15 percent for all others.
Alternative Minimum Tax (AMT)
The exemption is increased to $52,800 (from $51,900) for single taxpayers, $82,100 (from $80,800) for joint filers and $41,050 (from $40,400) if married and filing separately. These increases are permanent and will continue to be indexed annually for inflation. Also, certain non-refundable personal credits are permitted to offset the entire regular and AMT tax liabilities.
The personal exemption is $3,950 for 2014, an increase of $100. Phase-outs of the exemptions begin with adjusted gross income (AGI) of $254,200 ($305,050 for married taxpayers filing jointly).
Limitations for Itemized Deductions
The phase-out of itemized deductions (often called the "Pease" Limitation) returned for 2013 and continues to impact taxpayers for 2014. Married taxpayers filing jointly with AGI of $305,050 or higher ($254,200 for single taxpayers) will once again see their itemized deductions reduced by 3 percent of the amount by which their AGI exceeds these thresholds. This reduction is capped at 80 percent of itemized deductions.
Medical Expense Deduction
The medical expense deduction is once again limited to a 10-percent-of-AGI threshold for taxpayers under age 65. Those age 65 and older (or whose spouse is 65 or older) still have through 2016 to use the 7.5-percent threshold previously applicable to all taxpayers.
Standard Mileage Rates
The standard mileage rate is 56.0 cents per mile for business use of car, 23.5 cents per mile for medical and moving purposes and 14 cents per mile for charitable purposes.
Retirement Savings Plans Continue
IRA deductions may be available for those covered by other plans subject to certain dollar limits and phased out for single and joint taxpayers with AGI between $60,000 to $70,000 and $96,000 and $116,000, respectively. For joint filers where only one spouse is covered by another plan, the phase-out range is $181,000 to $191,000.
Roth IRA Income Limits
Roth contributions may be allowed for those with MAGI of less than $129,000 for single taxpayers and $191,000 for joint filers.
American Opportunity Tax Education Credit Continues
Up to $2,500 of credit per student is available for qualified higher-education expenses, such as tuition and cost of books. Phase-out begins at MAGI of $80,000 for single filers and $160,000 for joint filers.
Tax Benefits for Adoption
The maximum adoption credit increased to $13,190 for out-of-pocket expenses for the legal adoption of a child. The credit is nonrefundable and phases out for taxpayers with MAGI exceeding $197,880.
A Residential Energy Efficient Property Credit is still available (until 2016) to taxpayers who install certain energy-efficient property, such as photovoltaic panels, solar water heating property, fuel cell property, small wind energy property and geothermal heat pumps. The credit is available for expenditures incurred for such property up to a specific percentage, although a cap applies to fuel cell property. The property purchased cannot be used to heat swimming pools or hot tubs.
Individual Tax Extenders
The Tax Increase Prevention Act of 2014, signed into law by President Obama on December 19, 2014, renews the individual tax extenders through 2014. Some of the relevant tax extenders include:
- State and Local Sales Tax Deduction – taxpayers may elect to deduct state and local sales tax rather than state and local income taxes.
- Higher Education Deduction – an above-the-line deduction is available for qualified tuition and fees for post-secondary education. The maximum deduction is $4,000 for taxpayers with AGI not exceeding $65,000 ($130,000 for married taxpayers filing jointly), $2,000 for taxpayers with AGI between $65,000 and $80,000 ($130,000 to $160,000 for married taxpayers filing jointly) and $0 for other taxpayers.
- Teachers' Classroom Expense Deduction – an above-the-line deduction is available for primary and secondary education professionals (grades K-12, including school administrators and assistants) reflecting qualified out-of-pocket expenses of up to $250.
- Mortgage Debt Exclusion – up to $2 million ($1 million for married taxpayers filing separately) may be excluded from income for cancellation of mortgage debt on a principal residence.
- Mortgage Insurance Premium Deduction – a deduction is available for premiums paid or accrued in connection with acquisition debt of a primary or second home. The PMI deduction is reduced by 10 percent for each $1,000 by which the taxpayer's AGI exceeds $100,000. The deduction disappears completely for most homeowners whose AGI is $109,000 ($54,500 for married taxpayers filing separately).
- Charitable Distributions from IRAs – individuals age 70-½ and older may make annual tax-free distributions, up to $100,000 per taxpayer, from IRAs to qualified charitable organizations.
- Transit Benefits Parity – up to $250 per month may be excluded from income for employer-provided mass-transit and parking benefits.
- Contribution of Real Property for Conservation Purposes – a maximum deduction of 50 percent of AGI in any given year is available for the donation of a conservation easement.
Affordable Care Act
A year after taking effect, the Affordable Care Act has additional tax and reporting consequences for the 2014 tax year as noted below.
Premium Tax Credit – Individuals who received an advanced premium tax credit (subsidy) during 2014 must file a 2014 federal income tax return in order to reconcile the allowed premium tax credit with the advanced credit (subsidy) received. The actual allowed credit is based on actual 2014 income and is reconciled with the subsidy received to determine whether the net result is a refundable credit or an additional tax due.
On January 26, 2015, the Internal Revenue Service announced penalty relief for taxpayers who find they owe tax when they reconcile the advance payments of the premium tax credit they received with the amount they were entitled to when they file their 2014 tax returns. Taxpayers who owe tax as a result of the advance premium credit will not be subject to late payment or underpayment of estimated tax penalties.
Exemptions from Having Health Coverage – Individuals without health insurance coverage for all or part of 2014 may qualify for a hardship-based exemption and avoid the corresponding penalty. Qualification for some exemptions are available when the taxpayer files his or her 2014 federal return, while others are available only through the marketplace. Regardless of how the exemption is obtained (there are 19 possible scenarios), qualifying taxpayers must file Form 8965 (Health Coverage Exemptions) with their 2014 federal return.
Penalty for Not Having Health Insurance (Individual Shared Responsibility Payment) – An additional tax (penalty) will be assessed when a taxpayer (and each member of his or her family) does not have health insurance coverage for at least nine months during 2014. No penalty will be assessed if taxpayers have already obtained an exemption from the requirement to have health insurance coverage through the marketplace or upon filing their 2014 tax return (as discussed above).
If applicable, the penalty for 2014 is the greater of:
- 1 percent of the individual's income that exceeds their 2014 filing threshold (personal exemption plus standard deduction for individual's filing status) or
- A flat dollar amount that is assessed for the taxpayer, spouse and dependents as follows:
- $95 for the taxpayer, spouse and dependents over age 18;
- $47.50 for each dependent under age 18;
- The maximum family flat dollar amount for 2014 is $285.
Estate and Gift Tax Changes
The top estate and gift tax rate increased to 40 percent, the estate tax exemption increased to $5.34 million and the annual per-donee gift tax exclusion remains at $14,000 for 2014. Additionally, estate tax portability was made permanent.
Property Purchased by Businesses
Effective for taxable years beginning on or after January 1, 2014, the IRS finalized regulations that provide guidance for when taxpayers should capitalize or deduct as a current expense repairs on tangible property, plus the deductibility of materials and supplies. A deduction for materials and supplies is allowed under a de minimis rule that includes property that has an acquisition or production cost of $200 or less. Also, another de minimis safe harbor states that for repairs to be deductible, among other requirements, the unit of property must cost less than $5,000 per invoice or item substantiated by the invoice for taxpayers with applicable financial statements and $500 per invoice for taxpayers without applicable financial statements.
Business Start-up and Organizational Costs
Deductions of up to $5,000 of business start-up and $5,000 of organizational costs paid are still available in the year in which an active trade or business begins. The $5,000 deduction is reduced by the amount of total start-up or organizational costs that exceed $50,000. Any remaining costs must be amortized over 180 months.
Small Employer Pension Plan Startup Cost Credit: For 2014
Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50 percent of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
Employer-Provided Child Care Credit: For 2014
Employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of "qualified child care expenditures," including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility and for resource and referral expenditures.
Business Tax Extenders
The Tax Increase Prevention Act renews the business tax extenders through 2014. Some of the relevant tax extenders include:
- Bonus Depreciation – a depreciation deduction equal to 50 percent of the unadjusted basis of qualified property continues.
- Section 179 Deduction – businesses can expense up to $500,000 of qualified depreciable property under Section 179, with phase-out beginning when property placed in service exceeds $2 million. Off-the-shelf software continues to qualify for the election, as well.
- Qualified Leasehold/Retail Improvements, Restaurant Property – an election to treat up to $250,000 of qualified property as Section 179 property is available.
- Research Tax Credit – a credit for business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research is available. The research credit generally allows taxpayers a 20-percent credit for qualified research expenses or a 14-percent alternative simplified credit.
- Work Opportunity Tax Credit – a credit is available for employers that hire military veterans and other qualified individuals. The credit amount is generally equal to 40 percent of up to $6,000 (higher for some veterans) in qualified first-year wages.
- Exclusion for Gain on Qualified Small Business Stock – 100-percent exclusion of gain on the sale or exchange of qualified stock held for more than five years by non-corporate taxpayers.
- Reduced Recognition Period for S Corporation Built-in Gains Tax – the recognition period is five years versus 10 years for built-in gain following conversion from a C to an S corporation.
Affordable Care Act
Effective January 1, 2015, all employers with 100 or more monthly full-time employees must offer either:
- Health insurance coverage constituting minimum essential coverage (70 percent of full-time employees for 2015, increasing to 95 percent for 2016) or
- Pay tax equal to $2,000 annually ($167 monthly) for each full-time employee in excess of 80 total employees.
No penalties will apply for the 2015 plan year to employers with between 50 and 99 full-time equivalent employees in 2014 as long as the employer provides the appropriate required certification, reported on Form 1094-C. Furthermore, employers with between 50 and 99 employees have until January 1, 2016, to ensure they offer affordable health insurance coverage to their full-time employees.
Credit for Employee Health Insurance Expenses of Small Employers
Eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $25,400 or less are eligible for the full credit. The credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $25,400. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $50,800 or more. Beginning in 2014, the credit is available on a sliding scale for up to 50 percent of the employer's contribution toward employee health insurance premiums (35 percent for tax-exempt organizations), is allowable only if the health insurance is purchased through a SHOP Exchange and is available only for two-consecutive taxable years.