Many of your listeners are — or should be — starting to think about tax planning. This article should provide a list of tax questions the reader can take to his or her tax professionals. I will summarize where we are today with respect to what’s coming up in 2015, as well as review calendar year 2014 tax laws.
First, there are the tax changes in Obama’s 2015 budget. To start off on a positive note, Obama is proposing the elimination of capital gains taxes on investments in small business stock. There is also talk of bringing back the section 179 deduction, but Obama is, furthermore, looking to repeal LIFO accounting rules — which benefit businesses in times or rising inflation – make S Corps responsible for self-employment taxes, and close some loopholes, like eliminating some tax shelters, and changing the rules on cost basis for certain stock portfolios, while expanding the earned income and child tax credits.
The President also wants businesses with more than 10 employees to begin automatically enrolling employees in IRAs. Businesses would receive tax credits to offset the fees associated with setting up these IRAs, and employees could opt out. I like the idea, but time will tell whether this happens.
Second, we have the Affordable Care Act kicking in in 2015, where employers with 50 plus full-time employees, or a combination of full-time & part-time employees in 2014, must offer a minimum level of healthcare to their employees, or pay the IRS “employer shared responsibility payments” for any full-time employees who purchase coverage in the marketplace.
Employers failing to offer minimum coverage would pay a penalty of approximately $2,080 per full-time employee. If they fail to offer coverage, and the employee qualifies for “premium tax credits” — which are subsidies to insurance companies to reduce individual premiums — the company would pay $3,120 for each of those individuals.
Starting in January, Individual tax payers will begin receiving IRS Form 1095A to report their medical coverage. If an individual did not have insurance for three-(3) months or more, they may be subject to a penalty that must be paid with one’s taxes, which will be known as an “individual shared responsibility payment.” The penalty is 1% of 2014 income, or $95 whichever is higher, and $47.50 per insured dependent under 18, up to $285; however, the minimum moves to $325 in 2015, and then $695, or 2.5% of income, in 2016.
Deducting medical expenses for those who itemize will move from a deduction of medical expenses above 7.5% of income to 10% of income, but if you are 65 or older you may use 7.5% through tax year 2016. Flexible spending accounts (FSAs) have moved up $50 in 2014 to $2,550 for 2014, and beginning in 2014, taxpayers will be able to carry forward $500 into the next calendar year.
Other tax changes in the President’s budget will be making permanent multiple tax provisions for green energy, while eliminating those for coal, oil & gas; For US businesses that operate on an international basis, the foreign tax credit will be taxed on a pooled basis to raise tax revenue, and the budget, moreover, calls for repatriating foreign earnings currently held abroad. In addition, Obama is proposing a “financial crisis responsibility fee” that will be based on liabilities as opposed to bank assets.
Last, coming up for a vote again on December 11th is “Internet Tax Freedom Act,” which is intended to keep commerce on the Internet tax-free.
Third, I would like to highlight other tax law changes for 2015 and summarize the tax laws for this year. Here is a quick review:
- Itemized deductions for high income taxpayers will be limited to a 28% tax bracket, instead of where they would fall in 2015. (In fact, most of Obama’s 2015 tax proposals aim to raise taxes on high-income earners.)
- There is the “Buffet Rule, or “Fair Share Tax,” that imposes a minimum 30% tax rate on high income earners. (You will recall that the American Taxpayer Relief Act of 2012 added a 39.6% tax bracket at $228,800 for Married Taxpayers Filing Separately, $406,750 for Unmarried Individuals $432,200 Heads of Household, and $457,600 for Married Filing Joint Returns.)
- The Estate Tax moves up from 40 to 45% above $5.34 million ($10.68 million per married couple) and the Gift Tax moves up to $14,000 per year beginning in 2015.
- On capital gains, taxpayers at the 15% tax bracket, or below, will pay no capital gains, while individuals between 15 and 25% will pay 15%; taxpayers in the highest bracket will pay 20%.
- Unmarried taxpayers & singles with more than $200,000 in income (and married couples filing jointly with more than $250,000,) in addition, will pay a 3.8% Medicare surcharge on investment income making their effective tax rate 23.8%.
- On wages earned for unmarried tax payers & singles with more than $200,000 in income (and married couples filing jointly with more than $250,000) there is an additional .9 % Medicare tax.
- Social security tax remains at 6.2%, but the maximum increases from $113,700 to $17,000 due to a COLA increase.
- The standard deduction increases $100 (to $6,200) for single, and married filing separately, to $9,100 for head of households (up $150,) and to $12,400 (up $200.)
- Each personal exemption for 2014 increased $50 to $3,950.
- The Mileage Deductions for 2014 is $0.56 for business miles, $0.14 for charity and $0.235 for medical miles.
- Contributions for 401(k) and 403(b) plans remain at $17,500, and catch up contributions continue to be at $5,500; SIMPLE Retirement plans, meanwhile, stay at $12,000, with a $2,500 catch up. Income limits on Traditional & Roth IRAs is up modestly again: The Traditional IRAs income phase out is $60K for single and head of households, $96,000 for joint filers. The Roth phase-outs $114,000 for single and head of household, $181,000 for joint returns.
- The Alternative Minimum Tax (ATM) is estimated to start at $53,600 for individuals, $83,400 for married couples, $41,725 for married filing separately and $23,800 for estates & trusts.
- Student loan interest phase outs above $2,500 in student loan interest.
- IRA owners 70.5 years or old can no longer distribute up to $100,000 tax-free to charity, it must first be taxed as ordinary income.
- Mortgage insurance premiums will no longer be treated as interest.
- The home office credit has been simplified to $5 per square foot up to $1,500.
The intention of some the abovementioned tax increases is to pay for a future cut in the corporate rate to 28%, 25% for manufacturers … but, of course, we have heard that before.
In the end, however, I think, overall the news for taxpayers this year is good, if your income has been about the same, as the COLA increases built in the tax law should boost most taxpayer’s return between $50 to $150 this year, because inflation has remained essentially unchanged in 2014.
James J. Talerico, Jr., President & CEO, Greater Prairie Business Consulting