At the end of 2013 a number of tax deductions that Congress has habitually renewed each year were allowed to expire. The word is that many of them will not be renewed this time.
One of the expiring provisions formerly allowed people over 70 and 1/2 years old to make charitable donations of up to $100,000 directly from an IRA. This saved tax money because the distributions were not counted as income to the IRA-owner and was therefore not subject to any limitations involved in claiming it as an itemized deduction. It was just a direct payout from the IRA, bypassing the person's tax return.
Another provision was a temporary measure established during the housing crash of a few years a go. It allowed people who lost their homes and had their mortgages written off by the lender to avoid declaring the forgiveness of the mortgage as income. This will no longer be automatic, starting in 2014. However, there are still circumstances in which such debt forgiveness will not be taxed.
If you have questions about the fate of a particular tax deduction, consult your favorite tax professional!
Wednesday, January 22, 2014
Tuesday, January 21, 2014
Obamacare
2014 sees the beginning of the Federal penalties for not having health insurance. People in Massachusetts have been dealing with state penalties for a few years. Now the state penalty will be replaced by the Federal penalty.
People who are deemed not to be able to afford health insurance are exempt from the penalty and may receive a tax credit.
The penalty is not easy to state clearly.
The basic penalty is $95 per household member or $47.50 for children under 18. There is a ceiling of $285 per household for this method of calculating the penalty.
The alternative calculation for the penalty is 1 percent of your income. The "income" for this calculation is reduced by the basic filing requirement for your filing status ($10,150 for single people, $20,300 for married filing jointly, etc.) plus $3,950 per dependent. The ceiling for this calculation is the average cost of a "bronze-level" insurance plan, which is the basic entry-level plan. This amount will vary from state to state.
The penalty will be the higher of these two calculations.
Here is a strange thing: If you owe the penalty and it results in you having a balance due on your 2014 return, the IRS is not allowed to go after you for it. It is not even allowed to charge interest on it. If in the future you have a refund coming to you, the IRS can deduct your 2014 balance due from it. That's the worst it can do.
The penalty (now called a tax by order of the Supreme Court) for not having health insurance will go up quite a bit in 2015 and 2016. In 2015 it will be 2% of income or $325 per person. In 2016, it will be 2.5% of income or $695 per person. After that it will be adjusted for inflation.
People who are deemed not to be able to afford health insurance are exempt from the penalty and may receive a tax credit.
The penalty is not easy to state clearly.
The basic penalty is $95 per household member or $47.50 for children under 18. There is a ceiling of $285 per household for this method of calculating the penalty.
The alternative calculation for the penalty is 1 percent of your income. The "income" for this calculation is reduced by the basic filing requirement for your filing status ($10,150 for single people, $20,300 for married filing jointly, etc.) plus $3,950 per dependent. The ceiling for this calculation is the average cost of a "bronze-level" insurance plan, which is the basic entry-level plan. This amount will vary from state to state.
The penalty will be the higher of these two calculations.
Here is a strange thing: If you owe the penalty and it results in you having a balance due on your 2014 return, the IRS is not allowed to go after you for it. It is not even allowed to charge interest on it. If in the future you have a refund coming to you, the IRS can deduct your 2014 balance due from it. That's the worst it can do.
The penalty (now called a tax by order of the Supreme Court) for not having health insurance will go up quite a bit in 2015 and 2016. In 2015 it will be 2% of income or $325 per person. In 2016, it will be 2.5% of income or $695 per person. After that it will be adjusted for inflation.
Friday, January 3, 2014
What's new in taxes?
I have to admit that commentary on taxes can be pretty dull most of the time, but as a CPA it is my duty to say something about it now and then.
The last tax deal between Democrats and Republicans renewed most of the Bush era tax laws, but raised some taxes for "upper income" people. Also, the Affordable Care Act (AKA Obamacare) has added some taxes for "the rich," most notably the Medicare tax on investment income for people in high income brackets.
People in low to moderate tax brackets continue to have a safe harbor in which capital gains are not taxed at all. This zero percent capital gains rate exists for them until their total taxable income moves above the 15% tax bracket. Above that point, more and more of the gains will be taxed at a rate of 15%.
In the highest tax bracket, a 20% capital gains rate applies, and the 3.8% Medicare tax on investment income kicks in.
People in high tax brackets may see their taxes quite a bit higher this year. For other people, the difference may be slight or non-existent.
Moving forward to 2014, the only thing worthy of comment so far is that a large number of miscellaneous tax breaks expired at the end of 2013. This is something that has happened in each of the past several years, and Congress has subsequently restored them. Thus this is apparently no big deal. However, it is always possible that this could be the year that they decide not to renew them.
The only one that is really "big" is the expanded Section 179 deduction that small businesses can use to write off large purchases of equipment. This deduction is suddenly reduced from a maximum of $500,000 to its original level of $25,000. I.e., it goes from really great to practically nothing. Some businesses that use it a lot could find themselves suddenly paying a lot of taxes unless it is changed.
The last tax deal between Democrats and Republicans renewed most of the Bush era tax laws, but raised some taxes for "upper income" people. Also, the Affordable Care Act (AKA Obamacare) has added some taxes for "the rich," most notably the Medicare tax on investment income for people in high income brackets.
People in low to moderate tax brackets continue to have a safe harbor in which capital gains are not taxed at all. This zero percent capital gains rate exists for them until their total taxable income moves above the 15% tax bracket. Above that point, more and more of the gains will be taxed at a rate of 15%.
In the highest tax bracket, a 20% capital gains rate applies, and the 3.8% Medicare tax on investment income kicks in.
People in high tax brackets may see their taxes quite a bit higher this year. For other people, the difference may be slight or non-existent.
Moving forward to 2014, the only thing worthy of comment so far is that a large number of miscellaneous tax breaks expired at the end of 2013. This is something that has happened in each of the past several years, and Congress has subsequently restored them. Thus this is apparently no big deal. However, it is always possible that this could be the year that they decide not to renew them.
The only one that is really "big" is the expanded Section 179 deduction that small businesses can use to write off large purchases of equipment. This deduction is suddenly reduced from a maximum of $500,000 to its original level of $25,000. I.e., it goes from really great to practically nothing. Some businesses that use it a lot could find themselves suddenly paying a lot of taxes unless it is changed.
Wednesday, January 30, 2013
Education credits delayed
The IRS has added form 8863, education credits, to the list of forms they will not process until February or March. Returns that include form 8863 will not be accepted until the IRS says they are ready.
Tuesday, January 29, 2013
E-Filing Starting
The IRS will begin accepting e-filed tax returns on January 30. Most individuals will be able to e-file on this date. Some taxpayers who use certain forms will still not be able to file until February and even March. Click on this link to see the list of affected forms. Probably the most common of these is form 4562 for depreciation and amortization. Many taxpayers who have businesses use this form. Many of the others are quite obscure.
Wednesday, January 9, 2013
News flash
The IRS will begin accepting electronic returns on January 30. There will be a few types of returns that will require further updating by the IRS; such returns will not be accepted until a later, as yet unspecified date. Check with your tax professional for details.
Tuesday, January 8, 2013
Tax legislation, effects on 2012
Most of the fighting about the fiscal cliff was about things that will take effect in 2013, but a large number of items that affect 2012 taxes were finalized as part of the package. Most of them simply continue measures that were in place for 2011, but would have expired for 2012 if no action had been taken.
The biggest of these items concerns the Alternative Minimum Tax (AMT). When this tax was put into place years ago, it was supposed to affect only high-income people. Inflation was raising everyone's incomes up to the point where more than half of returns filed would be affected by it. A "patch" was put into place for the last couple of years; the patch temporarily raised the AMT exemption levels sufficiently that it would bypass most people. The patch was due to expire for 2012, and a lot of people would have gotten whacked. This new legislation made the "patch" permanent. Therefore far fewer people will have to worry about AMT for 2012.
Another big one for businesses has to do with the purchase of machinery and equipment. For the past few years, huge tax write-offs have been available on such items, as another measure to stimulate the economy. These write-offs were supposed to be much reduced in 2012 and then expire in 2013. But they have been extended for at least another year.
In addition to that, a number of other deductions and credits which had been living on annual extensions for a couple of years have been extended again, and some have been made permanent. These will be in effect for 2012. Here are a few of them:
*Refundable child tax credit
*"Marriage penalty" relief
*Student loan interest deduction
*Teacher expenses deduction
*College tuition credits
*Direct donations from IRAs for people 70 1/2 years or older
*Certain renewable energy credits
And many more. Consult your tax professional for any that you believe specifically affect you.
The biggest of these items concerns the Alternative Minimum Tax (AMT). When this tax was put into place years ago, it was supposed to affect only high-income people. Inflation was raising everyone's incomes up to the point where more than half of returns filed would be affected by it. A "patch" was put into place for the last couple of years; the patch temporarily raised the AMT exemption levels sufficiently that it would bypass most people. The patch was due to expire for 2012, and a lot of people would have gotten whacked. This new legislation made the "patch" permanent. Therefore far fewer people will have to worry about AMT for 2012.
Another big one for businesses has to do with the purchase of machinery and equipment. For the past few years, huge tax write-offs have been available on such items, as another measure to stimulate the economy. These write-offs were supposed to be much reduced in 2012 and then expire in 2013. But they have been extended for at least another year.
In addition to that, a number of other deductions and credits which had been living on annual extensions for a couple of years have been extended again, and some have been made permanent. These will be in effect for 2012. Here are a few of them:
*Refundable child tax credit
*"Marriage penalty" relief
*Student loan interest deduction
*Teacher expenses deduction
*College tuition credits
*Direct donations from IRAs for people 70 1/2 years or older
*Certain renewable energy credits
And many more. Consult your tax professional for any that you believe specifically affect you.
Subscribe to:
Posts (Atom)
