INCOME TAX CONSIDERATIONS FOR 2014 INCOME TAX RETURNS Following are income tax items that could affect your return for 2014. Please review and make sure you have alerted your tax consultant for all of the items that may affect you (not all inclusive). INDIVIDUALS Individual Tax Rates remain at 2012 levels (adjusted for inflation) except for higher income taxpayers. A 39.6% rate will apply to taxable income above a certain threshold. ($457,600 for joint filers; $406,750 for single filers; $228,800 for married persons filing separately.) Long-Term Capital Gains and Qualified Dividends Tax Rate remains at 15% for taxpayers whose taxable income is below the top rate (39.6%). Taxpayers in the 39.6% bracket will be taxed at 20%. For taxpayers in the 10% and 15% tax brackets, the rate remains at zero. State and Local General Sales Taxes remain deductible through 2014. Taxpayers have a choice between using the IRS Sales Tax Deduction Table amounts or actual sales tax expenses for the year. Using your actual sales tax expense is cumbersome to calculate and document (receipts are required), but may be beneficial in years where you have large ticket items. Certain large ticket items can be added to the IRS table amount, but not all. Standard Deduction Marriage Penalty Relief is extended through 2014. Standard Deduction rises to $6,200 ($12,400 for married couples filing jointly) in 2014, up from $6,100 ($12,200 for married couples filing jointly) for tax year 2013. Personal Exemption rises to $3,950 in 2014, up from the 2013 exemption of $3,900. The personal exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly). Itemized Deductions claimed on 2014 returns of individuals with incomes of $254,200 or more ($305,500 for married couples filing jointly) are subject to phase-out limitations. In addition, certain deductions may be claimed only if they exceed a percentage of AGI: 10% for medical expenses (7.5% for certain older taxpayers), 2% for miscellaneous itemized deductions, and 10% for casualty losses. Alternative Minimum Tax (AMT) Exemption is permanently indexed for inflation. The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly), set by the American Taxpayer Relief Act of 2012, which indexes future amounts for inflation. The AMT exemption is reduced by 25 percent of the amount by which the alternative minimum taxable income exceeds $117,300 for single taxpayers ($156,500 for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly). Also for 2014 and beyond, nonrefundable personal credits can offset an individual's regular and alternative minimum tax and capital gains will be taxed at lower favorable rates for AMT. Qualified Tuition above-the-line deduction is extended through December 31, 2014. Dependent Care Credit is permanently extended. Educator Expense Deduction of $250 was extended through 2014 for certain expenses of eligible elementary and secondary school teachers.
Discharge of Qualified Principal Residence Indebtedness is excluded from gross income through 2014. Mortgage Insurance Premiums will be treated as deductible qualified residence interest for 2014. This is set to expire December 31, 2014. Nontaxable IRA Transfers to Eligible Charities of up to $100,000 are extended through 2014 for taxpayers who are at least 70 ½. Federal Estate Exemption amount is $5,340,000 for 2014 and $5,430,000 for 2015. Tennessee s estate tax exemption is $2,000,000 for 2014 and $5,000,000 for 2015. The Tennessee estate tax is set to expire in 2016. Arkansas and Mississippi have no estate tax. Federal Annual Gift Exclusion for gifts is $14,000 for 2014 and 2015. Maximum Federal Estate and Gift Tax Rate was changed to 40% for 2013 and forward. The maximum Tennessee estate tax rate for 2014 is 9.5%. Portability of unused estate and gift tax exemption between spouses is made permanent. A return must be filed to claim portability. Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the general 10% of AGI floor. Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year's return. In order to qualify for 2014, the taxpayer must be allowed a dependency deduction for the qualifying child. Another qualifying determination is that the qualifying child must be younger than the taxpayer. The credit is phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified AGI exceeding the following amounts: $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other taxpayers. A portion of the credit may be refundable through 2017. For 2014, the threshold earned income level to determine refundability is set by statute at $3,000. Legislation in early 2013 made the per child credit amount of $1,000 permanent. Education Credits: Back in 2009, significant changes were put in place for the Hope credit, including a name change to the American Opportunity Tax Credit. Due to legislation in early 2013, these changes continue through 2017. The maximum credit for 2014 is $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer's spouse, or a dependent) who is enrolled on at least a half-time basis. The credit is available for the first four years of the student's post-secondary education. For 2014, the credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers and between $80,000 and $90,000 for other taxpayers. Forty percent of the credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes. The term qualified tuition and related expenses includes expenditures for course materials (books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance). One way to take advantage of the credit currently is to prepay the following year s
tuition. In addition, if your child's books for the spring semester are known, those can be bought and the costs qualify for the credit. The Lifetime Learning Credit maximum in 2014 is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to acquire or improve job skills. As with the American Opportunity Tax Credit, eligible students include the taxpayer, the taxpayer's spouse, or a dependent. For 2014, the Lifetime Learning credit is phased out at modified AGI levels between $108,000 and $128,000 for joint filers and between $54,000 and $64,000 for single taxpayers. Coverdell Education Savings Account (ESA): For 2014, the aggregate annual contribution limit to a Coverdell education savings account is $2,000 per designated beneficiary of the account. The limit is phased out for individual contributors with modified AGI between $95,000 and $110,000 and joint filers with modified AGI between $190,000 and $220,000. The contributions to the account are nondeductible but the earnings grow tax-free if used for qualified education expense. Legislation in early 2013 made the contribution amount and AGI phase-out amounts permanent. The ESA is very similar to a 529 plan except that an ESA can be used for elementary school, secondary school or college while the 529 plan is only for college. Student Loan Interest: You may be eligible for an above-the-line deduction for student loan interest paid on any qualified education loan. The maximum deduction is $2,500. The deduction for 2014 is phased out at a modified AGI level between $130,000 and $160,000 for joint filers and between $65,000 and $80,000 for individual taxpayers. Legislation in early 2013 made certain rules permanent to keep the student loan interest deduction at its current levels. Kiddie Tax: For 2014, the kiddie tax applies to: (1) children under 18; (2) 18-year old children who have unearned income in excess of the threshold amount, do not file a joint return and who have earned income, if any, that does not exceed one-half of the amount of the child's support; and (3) children between the ages of 19 and 23. If, in addition to the above rules, they are full-time students. For 2014, the kiddie tax threshold amount is $2,000. Residential Energy Efficient Property Credit: Until 2016, tax incentives are available 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. A credit is available for the expenditures incurred for such property up to a specific percentage, except that a cap applies for fuel cell property. The property purchased cannot be used to heat swimming pools or hot tubs. This tax credit is 30% of the cost of alternative energy equipment that is installed in the taxpayer s home. BUSINESSES 50% First-Year Bonus Depreciation is extended through 2014. For certain property with a longer production period (such as aircraft), the placed in service date is extended through 2015. Enhanced Election to Expense (Section 179) Business Assets maximum expensing amount for 2014 is $500,000 subject to phase-out dollar-for-dollar once capital expenditures exceed $2,000,000. Beginning in 2015, the maximum expensing amount is scheduled to drop to $25,000 and the phase-out level will drop to $200,000.
15-year Recovery Period for Qualified Leasehold and Retail Improvements and Restaurant Property is extended through 2014. Capitalization v. Expensing for Materials and Supplies and Repairs: Effective for taxable years beginning on or after January 1, 2014, the IRS finalized regulations that determine 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. Work Opportunity Tax Credit is extended through 2014. The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. This gives your business an expanded opportunity to employ new workers and be eligible for a tax credit against the wages paid. Credit determined based on first-year wages paid for employees. 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. Legislation in early 2013 made this credit permanent. Electronic Funds Transfer: As of January 1, 2011, a corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS's Electronic Federal Tax Deposit System (EFTPS). S Corporation Built-In Gains Tax For 2014, the recognition period for built-in gains tax was reduced to 5 years (from 10 years). PATIENT PROTECTION AND AFFORDABLE CARE ACT CONSIDERATIONS (not all-inclusive) Additional Medicare Tax of 0.9% will apply to income from self-employment and wages of single individuals in excess of $200,000 annually. The threshold amount is $250,000 for a married couple filing jointly (threshold applies to joint compensation of the two spouses), or $125,000 for a married person filing separately. Employers are required to withhold this additional tax on the excess wages (over $200,000 regardless of filing status) that the employee receives from the employer. The employer may disregard the amount of wages received by the employee s spouse. Net Investment Income Tax of 3.8% will apply to unearned income. The tax is levied on the lesser of net investment income or the amount by which modified AGI exceeds certain dollar amounts ($250,000 for joint returns and $200,000 for individuals). Investment income is: (1) gross income from interest, dividends, annuities, royalties, and rents (other than from a trade or
business); (2) other gross income from any business to which the tax applies; and (3) net gain attributable to property other than property attributable to an active trade or business (This includes partnership and S Corporation pass-through passive activity income). Investment income does not include distributions from a qualified retirement plan or amounts subject to self-employment tax. This rule applies mostly to passive businesses and the trading in financial instruments or commodities. With this additional tax, the maximum net capital gains rate is 23.8% in 2014. Because distributions from qualified retirement plans are not subject to the tax, taxpayers may want to invest in retirement accounts, if a good financial investment, rather than taxable accounts. Limit on Pre-Tax Contributions to healthcare flexible spending accounts will be capped at $2,500 per year. Disclosure of Health Insurance Costs on employee s 2014 Form W-2 s ; applicable to employers who file at least 250 Forms W-2. Further guidance will be issued on when small employers will be required to include the health insurance costs on Form W-2 s. Itemized Deduction of Medical Expenses threshold increases from 7.5% of AGI to 10% of AGI. The 7.5% threshold continues to apply through 2016 for individuals age 65 or over. Credit for Employee Health Insurance Expenses of Small Employers: For tax years beginning after 2009, 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 $25,000 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 $25,000. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $50,000 or more. The credit amount is 35% of certain contributions made to purchase health insurance (25% for a tax-exempt eligible small employer). Beginning in 2014, the credit is only allowable if the health insurance is purchased through a SHOP Exchange and is only available for two consecutive taxable years. See more on this below. Effective beginning 2014 Premium Tax Credit will be available for some taxpayers who are enrolled in a health plan through the Health Insurance Marketplace depending on family size and income levels that are found on www.healthcare.gov. The taxpayer has the option of having the estimated credit paid in advance to their insurance company or claiming the premium tax credit when they file their 2014 return. If the taxpayer chose to have advance credit payments forwarded to their insurer, they will have to reconcile their 2014 premium tax credit to the amount of the advance credit received. If the amount of the actual premium tax credit is more than the advance credit the taxpayer will receive a refund or owe less tax. On the other hand, if the amount of the actual premium tax credit is less that the advance credit the taxpayer may need to pay the difference when they file the 2014 tax return.
Penalties on Individuals for Not Carrying Minimum Essential Health Care Coverage will be imposed at a flat annual penalty of $95 or up to 1% of income over the filing minimum threshold, whichever is greater. The flat annual penalty and percentage go up each year. Additionally, Notice 2013-42, issued on June 26, 2013, provides transition relief from the shared responsibility provision for employees and their families who are eligible to enroll in certain employer-sponsored health plans with a plan year other than a calendar year if the plan year begins in 2013 and ends in 2014. Two Years of Tax Credits will be offered to qualified small businesses. Small business tax credits will expand to 50 percent of a small business s premium costs starting in 2014 for two consecutive years. These credits are available to businesses with average wages between $25,000 and $50,000, and fewer than 25 full-time workers (or 50 half-time workers) that offer health insurance through a health insurance exchange. SHOP Exchanges: Beginning in 2014, the Small Business Health Options Program begins to allow certain small businesses to obtain health insurance for their employees through an exchange. The program is designed for employers with 50 or fewer full-time equivalent employees. Coverage must be offered to all full-time employees working more than 30 or more hours per week. Self-employed persons with no employees cannot use the SHOP Exchange. A tax credit, discussed above, is available to some businesses that purchase insurance through a SHOP Exchange in 2014. Marketplace Exchange Notice: Employers were required to provide current workers the notice by October 1, 2013. The notice must be provided automatically, free of charge and written in language that the average employee can understand. It may be provided by first class mail or electronically if the requirements of the Department of Labor s (DOL) electronic disclosures safer harbor are met. For 2014, the DOL will consider a notice to have been timely delivered if it s provided within 14 days of an employee s start. We suggest including in new hire packets with sign offs required. The guidance on who this applies to is vague, so we suggest all employers issue these notices. Effective Beginning 2015 - Employer Penalties for Not Providing Healthcare to Employees of up to $2,000 will be imposed on employers with more than 50 employees who do not offer health insurance to their full-time workers defined as 30 hours per week. (There is a safe harbor look-back period for analyzing full-time employees that goes back up to 12 months, so employers should start planning). This was initially effective for 2014, but under Notice 2013-45, it has been extended to 2015. For employers with fewer than 100 employees but at least 50 employees in 2014, no employer penalty will be imposed in 2015 if the following conditions are met: 1) must employ at least 50 full-time employees but fewer than 100 employees during 2014, 2) during the time beginning 2/9/2014 and ending 12/31/2014, the employer may not reduce the size of its workforce or the overall hours of service unless there is a bona fide business reason, 3) during the time beginning
2/9/2014 and ending 12/31/2014, the employer does not eliminate or materially reduce the health coverage. Summary of Benefits coverage form must be provided by employers to employees. (This was for open enrollment periods beginning on or after September 23, 2012. The Good Faith compliance ends December 31, 2014.) Your business will be required to report information regarding the health coverage of your employees, including basic employee data, dates and type of coverage; cost-sharing; and any other information required by the IRS. These requirements apply to coverage offered on or after January 1, 2014, but the first mandatory report will not be due until 2015. More information on the requirement and its regulations is expected as January 1, 2015 approaches. Reporting of this information can be reported on a voluntary basis prior to 2015. Decisions regarding timing and coordination with the marketplace exchange notices will need to be made. Effective Following Future Regulatory Guidance: Non-Discrimination Rules will apply to employer health plans, prohibiting employers from offering different health insurance plans, premium subsidies, or benefits to high earners. As background, Section 105(h) nondiscrimination currently applies to self-insured plans. Under the Patient Protection and Affordable Care Act (PPACA), Section 105(h) applies to fully insured, nongrandfathered plans. However, the Internal Revenue Notice (IRS) in Notice 2011-1 delayed the effective date of that provision of PPACA until the IRS issues guidance on how Section 105(h) applies in the fully insured context. So for now, fully insured plans do not need to be concerned with Section 105(h). Importantly, though, if the plan allows employees to pay premiums on a pre-tax basis through salary reductions, then the plan would still be subject to the Section 125 nondiscrimination rules. There has been no guidance issued on Section 105(h) s application to fully insured plans since the IRS issued Notice 2011-1, which delayed the effective date indefinitely. Until new guidance is issued, fully insured non-grandfathered plans do not need to concern themselves with Section 105(h). Remember, though, that the Section 125 nondiscrimination rules may still apply to the fully insured plan. In addition, self-insured plans are currently subject to Section 105(h). Disclosure of Health Insurance Costs on employee s 2014 Form W-2 s only applies to certain employers (See Above). Further guidance will be issued on when small employers will be required to include the health insurance costs on Form W-2 s.