There are many tax changes that were implemented in 2014 or are now in effect for 2015 which may affect your individual return. From Obamacare to tax hikes and changes to standard deductions, there’s a lot to keep track of. To help you get organized for this tax season and beyond, review this summary of some of the most significant tax issues and changes you should be aware of.
1. Obamacare Penalties Kick In
The actionable component of Obamacare is the individual mandate goes “live” this tax season, requiring that consumers purchase health insurance or face a penalty of $95 or 1% of their annual income, whichever is greater. The penalty is $47.50 per child, up to $285 for a family. If you’re not covered for the entire year, you’ll pay the full penalty; if you only lack coverage for part of the year, you’ll pay 1/12 of the penalty per month you were without coverage. And if you only lacked coverage for three months or less, you won’t pay a penalty. To see health insurance options in your area, check out our National Benefits Platform here.
2. Changes to Flexible Spending Accounts and FSA limits:
2014 was a big year for health care-related tax changes. If you take advantage of a Flexible Saving Account (FSA) to help pay for future medical expenses with pretax dollars, you should note that in 2014 Congress made a change so that if you carry over funds (up to the $500 maximum carry over limit) into 2015, you will be disallowed from participating in an HSA in 2015.
The annual limit on employee contributions to flexible spending accounts is now $2,550 for qualified health care expenses. That's up $50 from 2014, so make sure you opt in for this new maximum amount if you take advantage of a health care FSA.
3. Only One Annual IRA Rollover Allowed
Up until now, individuals could use tax-free rollovers for each of their IRA’s. Starting in 2015, only one tax-free IRA rollover will be allowed for a period of one year for any number of IRA accounts. This includes SEP, SIMPLE IRA’s, Roth, and Traditional IRAs.
4. Income Tax Rate Changes
The American Taxpayer Relief Act of 2012, or ATRA, added a seventh federal income tax bracket (39.6%) in 2013, while the remaining six rates were unchanged. In 2014, taxable incomes above the following thresholds now fall into the 39.6% bracket: Married Filing Separately ($228,800), Unmarried Individuals ($406,750), Head of Household ($432,200), and Married Filing Joint Returns ($457,600).
5. Capital Gains Tax Updates
ATRA also made several important changes to the treatment of capital gains, and eliminated sunset provisions, adding stability and permanence to these rules including:
Income Threshold Changes: Individuals in the 10% and 15% tax brackets will pay 0% on eligible dividends and most capital gains.
Qualified Dividends: income received will be taxed at the same rate as long-term capital gains.
Tax Rate: individuals in the 25%, 33%, and 35% federal income tax brackets will pay 15% on capital gains, while taxpayers in the 39.6% bracket will pay 20%.
Unmarried individuals (Single) with income over $200,000 and Married couples filing jointly with income over $250,000 will also pay a 3.8% Medicare surcharge tax on investment income; thereby increasing the effective rate on capital gains to 23.8% (20% + 3.8%).
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6. Standard Deduction
The standard deduction—that is, the basic tax break extended to all Americans each year—rises to $6,300 for single filers and $12,600 for married taxpayers filing jointly in 2015. That's up $100 and $200, respectively, from 2014 figures. The standard deduction is crucial to tax planning and withholding, because if you cannot itemize enough deductions to surpass this amount, this is the only tax break the government will likely be giving you on next year's tax return.
7. Tax Brackets
For the new tax year starting in January, income tax thresholds have again been adjusted up for inflation. The highest tax rate of 39.6%, for instance, will now apply to single filers who make over $413,200 and married couples making $464,850. Both figures are up about 1.6% from tax year 2014. For more information on specific income tax brackets by filing status, check out the latest IRS revenue procedure document.
8. AMT Changes
The so-called "alternative minimum tax" is quite a headache for many middle-class Americans. Since certain breaks can significantly reduce your tax bill, the IRS created the AMT to set a limit on those benefits – and ensure a minimum tax burden on you. The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 for individuals or $83,400 for joint filers. That's up slightly, about 1.5% from 2014.
9. Social Security and Medicare
As was the case in the past, all wages earned in a given year are taxed at the 1.45% rate for Medicare. On your 2014 tax return, wages paid in excess of $200,000 for Unmarried filers and in excess of $250,000 for Married filers will be subject to an extra 0.9% tax. The Social Security tax rate remains at 6.20%, while the wage limit, or Social Security maximum, increases from $113,700 to $117,000. The Cost of Living Adjustment (COLA) was 1.5% in 2014, raising the SSI limit to $2,642 per month.
10. Unified Credits, Gift Tax and Estate Tax
ATRA also increased the estate and gift tax rate from 35 to 40%. The gift tax and estate tax exclusion continue to be indexed for inflation and increase to $14,000 and $5.34 million respectively in 2014.
11. Standard Deductions
According to the IRS, approximately two out of every three taxpayers claim the standard deduction on their income tax returns. For 2014, there was a change to the standard deduction amounts for all individual taxpayers, including:
Single (Unmarried Individuals): $6,200, an increase of $100
Married Filing Separately: $6,200, an increase of $100
Head of Household: $9,100, an increase of $150
Married Taxpayers Filing Jointly and Qualifying Widow(er)s: $12,400, an increase of $200
With a plethora of tax changes instituted last year and for the coming year, it is likely that you will notice the impact of several of them as you prepare to file your 2014 taxes. If you have never engaged a tax professional before to help you in your tax preparation or planning, this may be the year to do so to ensure that you reduce your tax obligations as much as possible and to avoid any costly penalties.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for consultants across the country. His website, www.cpaforfreelancers.com, has a resource section with how-to articles and information for freelancers.