Tax Law Changes for 2014 – What You Need to Know Before Filing Your Taxes

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Every year there are more and more tax law changes so that it is hard to keep track. Some laws expire; few come into play by default while others are retroactively revived. Any way it happens, it affects the taxpayers Here is a brief summary of some of the most important federal tax changes that will influence individual taxpayers in 2014.

Penalty unless there is Adequate Health Insurance: The Obamacare law states that citizens must have a minimum insurance coverage, failing which they will be penalized. This law is specifically applicable to non-exempt U.S. citizens and other legal residents. Lower income individuals and those with cancelled insurances are excluded.

Tax Credit for Buying Health Insurance: 2014 will have premium assistance credit available for eligible taxpayers while buying health insurance through state exchange or a partnership exchange between a state and federal government. You are eligible if your income is between 100-400% of the poverty line provided there is no employer sponsored coverage for you.

Carry-over $500 from last year’s Health Care FSAs: You can carry over $500 from your last year’s unused balance for health care Flexible Spending accounts (FSAs). This new deal is applicable, if you choose instead of having a grace period to use up your unused balance from the previous year. In other words, either you get the $500 or you get the grace period, but never both. To know what your company offers, contact your Employee Benefits Department. March 15 is the last date to use up your unused balance, if that is your company’s policy.

Annual Fee applies to Health Insurance providers: After 2013, the annual flat fee for the health insurance industry, which is $8 billion for 2014, will be allocated based on the health care provider’s market. The fee is not applicable to those companies whose net premium is $25 million or less.

Reduced Threshold for Schedule UTP: For the year of 2014, the total asset threshold for filing Schedule UTP falls to $10 million from $50 million. Certain corporations must report on Schedule UTP (Uncertain Tax Positions Statement) if either, the corporation has recorded a reserve with its tax position for U.S. federal income tax in audited financial statements, or the corporation did not record a reserve because it expects to litigate the position.

tax-law-changes-2014FATCA Implementation: Chapter 4 of the Code requires withholding of 30% of certain payments to a Foreign Financial Institution (FFI) unless there is an agreement between the IRS and the FFI to report certain information regarding U.S. accounts. FFI are also required to report payments made under FATCA and electronically file forms 1042-S.

3.8% Surtax on Unearned Income: Certain unearned income of individuals or trusts and estates are subject to 3.8% surtax either on the net investment income, or on the excess of Modified Adjusted Gross Income (MAGI) over the un-indexed threshold amount.

Increase in Fees: Under the final Regs, issued in December 2013, the fee for entering a regular installment agreement is increased from $105 to $120. From January 1, 2014, the

fee for processing an Offer in Compromise is also increased from $150 to $186. Although, low-income taxpayers and taxpayers making offers based on doubt will be exempt from this rule.

2014 is seeing many changes in tax  laws and policies and these are the result of changes in tax legislation passed in previous years or have come into play due to effective dates in regs, and rulings.

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2014 Tax Changes: What You Need to Know

2013-tax-changesThe time has come to start tax preparation for 2013-2014 tax year. There are many changes in tax rules for this year which may directly impact personal tax liability of taxpayers. Here is an overview of what you need to know before paying your taxes:

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New Medicare Contribution Tax 2014

 

Medicare-Contribution-TaxThe new Medicare contribution tax that came into effect from January 2014 is primarily targeted to high-income earners and mandated healthcare. This tax rule demands 3.8 percent tax on capital gains and investment income, including interest, rents, dividends, and royalties. It implies the single filers and joint filers making over $200,000 and $250,000 annual earnings respectively will be subjected to this tax rule. It may be noted that the same individuals will get an increase of 0.9 percent in the Medicare tax from this year.

If you are paying medical expenses at an individual level or using Flexible Spending accounts to compensate some of your healthcare costs, you may also be subjected to this new Medicare Tax Rule. It may be noted that as of 2014, the itemized medical deduction limit of adjusted gross income will increase from 7.5 percent to 10 percent. Also donations to health flexible spending accounts will be restricted to $2,500/year.

Estate Tax Changes

estate-tax-2013There are chances of significant increase in the estate taxes this year. Congress recently passed a tax compromise that prevents the “fiscal cliff” and makes permanent federal estate tax with an exemption of $5.12 million per individual and a tax rate of 40% for amounts over the exemption. If you have significant assets, your recipients will be subjected to higher tax penalties for any inheritance or gifts they receive. It can badly affect your estate planning for this year.

 

 

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Increase in Capital Gains Tax

capital-gains-2013Capital gains tax applies when you sell stocks, bonds or other investment assets for a profit. Short-term capital gains are taxed at your regular income tax rate. Gains realized on long-term investments that are held for at least one year prior to sale are taxed at a lower rate. Currently, the long-term capital gains tax is 15% but this is set to increase to 20% in 2014. This could have a significant impact on investors who may feel pressured to sell-off assets before the end of the year in order to minimize the capital gains tax. Under the new tax rules, dividends, which are currently taxed at the long-term capital gains rate, would be taxed at the ordinary income tax rate.

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Increase in Regular Income Tax Rates

increase-tax-rates-2013Perhaps the most significant tax change scheduled to take effect in 2014 is the increase in regular income tax rates. Unless Congress takes legislative action to prevent these tax changes, taxpayers may find themselves facing substantially higher tax bills. The current tax rates are based on a six-bracket division of income, with the maximum rate topping out at 35%. If the Bush-era cuts are allowed to expire, then the maximum tax rate will increase to 39.6%. Individuals in the lowest tax bracket will see their taxes increase from 10% to 15%. High-income earners may also see a reduction in the amount of itemized deductions they’re allowed to claim, which could also result in a higher tax bill.

Preparing for Tax Changes

While it’s not certain whether the proposed tax changes will take effect, there are several things you can do to make sure you’re prepared. For example, if you’re self-employed and invoice customers for payment, it may be to your benefit to try and collect on any outstanding bills before 2014 in case the marginal tax rates increase. If you’re thinking of switching a traditional IRA to a Roth IRA, you may want to do so now to lock in the 2014 tax rates on the conversion. It may also be to your advantage to shift dividend assets into a tax-advantaged investment account, such as an IRA. Finally, if you itemize deductions, you need to consider how they may or may not be able to offset your tax liability should your tax rate increase. Preparing yourself ahead of time is the best way to avoid any unpleasant surprises when the 2014 tax season rolls around.

Tax Tips and Tax Deductions for Bloggers

blogger-tax-deductionsMany people regard blogging as a hobby—something that they do in their spare time, for their own personal enjoyment.  But if blogging is your profession—an activity that you do for the purpose of making a profit—you probably qualify for various tax deductions that can help decrease your taxable income.

Before asserting any tax deductions, it is critical to make certain that the expenses you claim are legitimately related to a business that centers around blogging or includes blogging as a key component.  The Internal Revenue Service takes a dim view of people who try to pass off what is really a hobby as a small business, in an attempt to write off hobby expenses (more information on the hobby loss rule).

Getting Started:  Administrative Matters

If blogging is a business for you, you must adopt a tax registration status—sole proprietorship, limited partnership, limited liability company or incorporation– and prepare to file quarterly estimated taxes with the IRS, which can be paid via mail, phone or online.

Blogging-Related Tax Deductions

The following list includes examples of blogging-related expenses that may be eligible as tax deductions.

  • Office Equipment:  electronic office equipment—including computers, printers, fax machines and the like—depreciate in value and this can be deducted from your taxes.
  • Office Supplies:  the cost of print or toner cartridges, paper, pens and pencils, folders and other office supplies for business use is tax deductible.
  • If you have any employees or use subcontractors to perform work for you, there are deductible expenses—in the form of salaries, payments and fees–in both instances.
  • Online expenses:  Being a blogger means that you have an online presence and that brings associated deductible expenses including the cost of domain hosting, Website hosting, expenses directly associated with blog hosting, online advertising, the cost of an Internet Service Provider, Website design expenses, business-related online backup services, and so forth.

Other small business-related deductions possibly applicable to bloggers:

There are many other tax deductions applicable to many small businesses in general that may be relevant for bloggers.  These include:

  • The use of your home for your blogging business activities.  If you have a home office that is dedicated to your business, a portion of many of your general household expenses—rent or mortgage, utilities, home insurance, etc.—can be deducted from your taxes, usually in proportion to your office’s square footage relative to that of the entire home.
  • If you use a professional tax preparation service for your business, that cost is tax deductible.
  • Travel costs that are directly related to your business can be deducted, including attendance at trade expositions.
  • The costs associated with business stationery, such as business cards and letterhead are deductible.
  • If you use a vehicle for business-related activities, some proportion of maintenance and registration fees, plus mileage, can be deducted.
  • The cost of establishing yourself as corporation, LLP or LLC can be deducted, along with any business licensing renewal costs you may encounter down the road.
  • Costs that are incurred to advertise your business offline—such as in print or on television—are deductible.

 

Heading Back to School? Tax Breaks for Adult Students

college-tax-breaksWith unemployment still high, more older Americans are heading back to school in hopes of improving their job prospects. Of the estimated 20 million college students nationwide, 25% are over the age of 30, according to the U.S. Department of Education. The National Center for Education Statistics estimates that college enrollment among students 25 or older will increase by 23% through 2019. If you’re one of the millions of adult students who’s returning to school, you can potentially enjoy some significant tax savings while completing your education.

American Opportunity Credit

If you’re enrolling in an undergraduate program for the first time on at least a half-time basis, you may be eligible for the American Opportunity Credit. If you qualify, you can get a credit of up to $2,500 towards the cost of your tuition, books, fees, supplies and equipment. Up to $1,000 of the credit is refundable, which means you can get it even if you don’t owe the IRS any taxes. The credit expires at the end of this year but you can still claim it on your 2014 taxes as long as you’re within the IRS income limits. Single filers must have a modified adjusted gross income (MAGI) of $80,000 or less and joint filers can earn up to $160,000 to qualify.

Lifetime Learning Credit

Older students who are pursuing a graduate or professional degree can claim the Lifetime Learning Credit to offset some of their education costs. You can claim the $2,000 credit if any qualifying expenses, including tuition, books and fees. It’s important to note that you can’t take the credit for medical or transportation expenses you incur as a result of your enrollment. Your MAGI must be $61,000 or less if filing single and $122,000 or less if filing a joint return. Keep in mind that you can’t claim the credit if you’re married but file separately and you can’t take the American Opportunity Credit and the Lifetime Learning Credit in the same tax year.

Deducting Tuition and Student Loan Interest

Another option for reducing your tax liability is to claim one of two deductions for college expenses. The IRS allows you to claim a deduction for tuition and fees, which can reduce your taxable income by up to $4,000. The deduction is good towards any fees you pay as a condition of your enrollment but it doesn’t cover personal expenses like room and board or transportation. To qualify, your MAGI must be $80,000 or less for single filers and $160,000 or less for couples filing jointly. You can claim the deduction whether you paid the tuition and fees out-of-pocket or using a student loan. If you receive any tax-free education assistance, such as scholarships, grants or employer assistance, you can only claim the deduction for the amount of expenses you were actually responsible for paying.

Adult students who take out student loans to cover their education costs may also qualify for a deduction on interest paid. The deduction can reduce your taxable income by up to $2,500 as long as you were enrolled at least half-time in an accredited degree program at the time you took out the loan. Your modified adjusted gross income must also be within IRS limits to qualify. As of 2014, single filers were limited to a MAGI of $75,000 or less and joint filers could earn up to $150,000.

Tapping Your IRA for Education

If you’ve build up a retirement nest egg, using IRA funds to pay for your education is one option to consider if you don’t want to take out student loans. Typically, you must pay a 10% withdrawal penalty if you take money out of any IRA before age 59 ½. However, the IRS waives the 10% penalty if you’re using the money for qualified education expenses. To get the tax break, you must be enrolled at least half-time in an eligible educational institution, which is defined as any school that participates in federal student aid programs. You may still have to pay income tax on any part of the distribution that’s taxable unless it’s equal to or less than your adjusted qualified education expenses.

Earning a college degree is a significant achievement and it’s never too late to get started. With all of the tax benefits available to older students, it’s easier than ever to achieve your educational goals and save money along the way.

 

What Duty Free Means and How to Take Advantage of Duty Free Shopping

tax-free-dutyMost people have heard the term “duty free shopping” before, or seen “duty free shop” signs at airports, but many consumers have only a vague idea of what it means and how they can take advantage of it.

Duty Free Defined

The concept of duty free shopping enables the citizens of a country to shop for items in another country and return home with their purchases while avoiding some or all of the tax—or duty—on the price of purchase.  Essentially, the duty free exemption was created to allow individuals to avoid tariffs on commercial imports.

Duty free purchases also have the benefit of allowing the purchaser to avoid having to pay national and local taxes in the country where the duty free items were bought.  You may have to pay some or all of those taxes at the time of purchase, but upon returning home you have the opportunity to file an application to have those national and local taxes refunded.

Exactly how much of the duty can be avoided depends on:

  • How much was purchased (see the duty free exemption).
  • Where the items were purchased; qualifying items must have been purchased at duty free shops outside one’s country of origin.
  • Exactly what items were purchased; there are some limitations.

The Size of the Duty Free Exemption

In the United States, the exemption from duty is usually $800 per person for those individuals who have traveled outside the United States for at least 48 hours.  If you have been overseas for less than 48 hours the duty exemption is ordinarily limited to only $200 per person

Taking Advantage of Duty Free Shopping

The following points should help you take the best advantage of duty free shopping:

  • Watch the personal exemption limit.  There are significant penalties for exceeding the exemption; if you exceed the $800 personal limit, you’ll face a 3% surcharge up to $1800 and if you go beyond that you’ll face a tax of up to 25% for additional purchases.  Don’t forget that the 48-hour rule lowers the exemption to $200 per person.
  • Families can combine exemptions, so a family of four, for instance, can allocate goods among all family members to receive a collective exemption of $3200.
  • Children are not allowed to use their exemptions for alcohol or tobacco products, so if any of either category are brought home, an adult will have to carry them.
  • There are strict limits on amounts of alcohol and tobacco duty exemptions; the typical limit is one liter of alcohol and one carton of cigarettes per adult.
  • While duty free shops are typically found at points of entry—airports and seaports—they can be found in other places where tourists gather, including shopping malls and near international resorts.  Sometimes, the best duty free shopping opportunities will be found in spots away from points of entry.

 

Overview of How Tax Brackets Work

tax-brackets-2013Does the subject of the income tax code make your eyes glaze over?  Do the terms tax bracket, marginal tax rate and filing status make your head spin?  It doesn’t have to be that way.  While the nuances of the federal tax code may be complex, the basics are not.  Here’s how the progressive tax system in the United States works.

Filing Status

The tax bracket you fall into depends in part on your personal filing status.  There are five different filing statuses recognized by the Internal Revenue Service for the purposes of determining your tax bracket:

  • Single (not married or legally separated)
  • Married and Filing a Joint Return
  • Married, But Filing Separate Returns
  • Head of Household
  • Qualifying Widow or Widower (Must have a dependent child)

If you, as a tax filer, happen to fall into more than one of the above categories, you have the option of selecting the status with the lowest tax obligation attached.  That will depend on a wide assortment of possible deductions, credits and exemptions.

Tax Bracket

After determining your filing status, you are ready to attack the tax bracket itself.  For 2014, there will be six different tax rates:

  • 10%
  • 15%
  • 25%
  • 28%
  • 33%
  • 35%

The tax you owe is based on your adjusted earned income, which is your income in a year after including all of your eligible deductions, exemptions and credits.  That value is almost always lower—often far lower–than your gross income for a year.  It is worth noting that this income excludes any capital gains you may have earned, which are taxed at a separate rate (currently 20%) and reported via a schedule separate from the standard federal tax form.

The actual tax brackets themselves are variable depending on your filing status.  For instance, the 10% bracket ranges from $0 to $8375 for a Single filer and $0 to $11,950 for a Head of Household filer.

A Sample Calculation

The increasingly higher rates only apply to the income earned that falls within the bracket for that range.  For instance, consider the entire tax bracket for a Single filer:

  • 10% on income between $0 and $8375
  • 15% on income between $8375 and $34,000
  • 25% on income between $34,000 and $82,400
  • 28% on income between $82,400 and $171,850
  • 33% on income between $171,850 and $373,650
  • 35% on income over $373,650

For a person with a Single filing status with an adjusted income of $75,000, the tax owed would be calculated as follows:

  • 10% on the first $8375 of income ($837.50)
  • 15% on income between $8375 and $34,000 ($3843.75)
  • 25% on income between $34,000 and $75,000, the last dollar earned ($10,250)

The total amount owed in tax:

$837.50 + $3843.75 + $10,250 = $14,931.25

So, a Single filer who earned $75,000 in 2014 would fall into the 25% tax bracket, but that does not mean that the entire $75,000 is taxed at 25%.  Only the income above the previous tax threshold—in this case $34,000—is taxed at the highest applicable level (25% in our example).  That’s the effective definition of “marginal tax rates.”

 

IRS New Billing and Debt Collection Rules for Tax-Exempt Hospitals

health-care-taxThe passage of the Affordable Health Care Act has generated much debate, particularly because of the law’s provision which requires taxpayers to provide proof of health insurance. While the healthcare law has drawn criticism, there may be an upside for Americans who are struggling under the weight of crushing medical debt. At the direction of Congress, the IRS has proposed new rules that may offer relief to cash-strapped patients who can’t pay their medical bills.

Targeting nonprofit hospitals

The new regulations would apply specifically to those hospitals that operate as a tax-exempt, nonprofit charitable entity. Under the IRS guidelines, this would include government hospitals that have 501(c)(3) status, private nonprofit hospitals with 501(c)(3) status and any hospitals that are operated by a 501(c)(3) organization. Nearly 60% of all U.S. hospitals operate on a nonprofit basis, according to the American Hospital Association.

Under the proposed rules, any hospital seeking tax-exempt status would be required to maintain charity care policies to provide free or reduced cost health care to qualifying patients. Each hospital would also be responsible for ensuring that patients are aware of such policies. Currently, there is no standard for informing patients about charity care services. Many patients may find themselves on the hook for medical bills they can’t afford to pay simply because they’re unaware that they qualify for financial assistance programs.

Relief from unfair collection practices

The IRS is also aiming to put a stop to aggressive and unfair collection efforts, which may only create an additional financial hardship for patients. Specifically, the proposed rules would prevent tax-exempt hospitals from taking so-called “extraordinary collection actions”. The types of actions that would be expressly prohibited include:

  • Reporting negative information to any credit reporting bureau
  • Filing a civil lawsuit to collect a debt
  • Placing a lien against a patient’s personal or real property
  • Initiating a foreclosure action against a patient’s real property
  • Seizing a patient’s bank accounts or other assets
  • Seeking a wage garnishment against a patient

The new regulations would apply to those patients who qualify for charity care or other type of assistance program offered by the hospital. The IRS does, however, allow for an exception to this rule if a patient fails to properly apply for aid. In those cases, the patient would be allowed up to 240 days to submit the required paperwork before collection efforts could begin.

New rules not a substitute for health insurance

For the millions of Americans who don’t have health insurance, the IRS rules could translate to a significant savings in the short-term, however, they don’t eliminate the need for health care coverage. The Affordable Health Care Act mandates that everyone must have health insurance by 2014 in order to avoid a potentially significant tax penalty. It’s estimated that approximately 30 million Americans will become eligible for Medicaid or subsidized private insurance once the law takes effect. In the meantime, patients who can’t afford to pay their hospital bills are urged to explore their financial assistance options, rather than put off seeking medical treatment.

While the proposed rules would provide a substantial benefit to qualifying patients, they have been met with criticism. Specifically, the American Hospital Association has questioned their necessity, arguing that the proposed rules may make it more difficult for hospitals to identify and meet the needs of the communities they serve.

The rules are open to public comment until September 24, 2014. If no additional revisions are necessary, the rules could take effect shortly thereafter. Hospitals that operate on a for-profit basis would not be required to adhere to the new guidelines, however, it’s hoped that they will adopt the measures if passed.

 

Guide to Deducting Moving Expenses on Your Tax Return

If you recently experienced a career change that necessitated relocating to a new city, you could claim most of your moving expenses as a deduction on your tax return. You would use Form 3903 to figure out your moving expenses and report them as income adjustments on your 1040 form.

Qualifications for Claiming Moving Expenses on Taxes

Moving expenses are deductible if they are closely related to the start a new job moving-expensesyou meet certain time and distance criteria. Moving expenses incurred within one year of your first day at your new job are considered closely related to your relocation. If you don’t move within a year of starting your new job, you cannot claim moving expense deductions unless you provide an explanation of extenuating circumstances that prevented you from moving during that period.

Your move is also considered closely related to the start of your new job if the distance from your new residence to your new job does not exceed the distance from your former home to your new job. You could still deduct moving expenses if you don’t meet these criteria, however, if your job requires you to reside at your new home and/or it requires less money and time to travel back and forth from your new residence to your new job.

Distance Requirements

Your new job location must be 50 or more miles from your old address than your previous job’s location. If it’s your first job, the location must be 50 or more miles from your old address.

Time Requirements

You must work for 39 weeks, fulltime, during your first year upon your arrival at your new workplace. Self-employed individuals must work full-time for 39 weeks during their first year and a total of 78 weeks during their first two years after they arrive at their new location.

Deductible Moving Expenses

Moving expenses related to packing and transporting household and personal items from your old address to your new home are deductible. Other allowable deductions include:

  • Costs for utility connection/disconnection
  • Shipping costs for transporting your car to your new residence
  • Costs for transporting your pets
  • Costs for moving your household and personal items from a place other than your former home to your new residence
  • Cost for storage and insuring of household and personal items
  • Transportation, car mileage (if traveling by car) and lodging expenses

Non-Deductible Expenses

Some non-deductible moving expenses include:

  • Costs for moving furniture purchased enroute to your new home
  • Expenses incurred during travel back to your former home
  • Moving-related expenses incurred prior to your move
  • Real estate taxes
  • Expenses related to the sale of your former home or purchase of your new home
  • Costs for driver’s licenses or car tags
  • Security deposits

Refer to IRS Publication 521 (201.1) for more information on allowed and not allowed deductions and individuals exempt from time and distance test requirements, such as members of the armed forces, retirees, or persons who involuntarily separate from their job.

 

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