With the looming fiscal cliff at the beginning of 2013 and the mid-year calls for tax reform, this year has been unusually tempestuous for taxpayers. While changes to next year’s tax laws are far from a certainty, financial experts are already looking at ways to prepare their clients’ business and personal tax returns in 2014. Here are a few of the most likely changes and how to prepare for them before they become pressing concerns in April.
Fixed Tax Brackets
Part of the fiscal cliff fallout included making tax brackets standard for the near-term future, so you can expect some continuity from last year. The 2013 percentages – 10, 15, 25, 28, 33, 35, and 39.6 percent – will remain, but the Internal Revenue Service will draw the lines in slightly different places. Forecast increases for tax brackets range from just under 1 percent to about 2 percent. In other words, if your 2013 tax return as a married individual filing separately was on taxable income of $225,000, you belonged in the uppermost tax bracket. In 2014, that projected line of demarcation will be closer to $227,250, an increase of about 0.9 percent.
Note that the leap between the 15 percent and 25 percent tax brackets is the largest on the table. If you were above that line with an income of greater than $36,250 as an individual or $72,500 for married couples filing jointly in 2013, talk with your financial advisor about how to invest your money and make the most of tax shelters to drop into the lower tax bracket next year.
The Fair Share Tax
For those with higher incomes, one part of the proposed 2014 tax plan could have far-reaching effects. In April, President Barack Obama released a budget proposal that included a new tax on adjusted gross income greater than $1 million annually. The new proposal, sometimes called the Buffett Rule as a response to investor and analyst Warren Buffett’s statement that his effective taxable income was smaller than his secretary’s, is not yet a part of 2014’s tax law, but it is a possibility. The tax proposal calls for millionaires to pay at least 30 percent of their AGI in income taxes and would potentially reduce current tax shelters significantly.
In its current state, the Fair Share Tax is a proposal, not a complete and specific plan. However, it signifies the direction that tax laws may take in 2014 and suggests that high-wealth individuals and families should seek financial advice on ways to protect their investments.
Health Care Reform
Changes to the Affordable Care Act have been prominent features for financial news sources. While delays on expected ACA payments and penalties for businesses has given them until 2015 to comply, individuals must still meet the standards of the law or face penalties, at least for now. Discussion about whether to extend the reprieve to individuals as well is ongoing, so making any plans for 2014’s health care costs may need to wait until later this year when the dust settles.
Some of the changes that took place in 2013 include an increase on Medicare taxes for those with earned income higher than $250,000. New Medicare taxes also affected investment income, although income from retirement funds will be exempt. Flexible spending account (FSA) allowances dropped from $5,000 to $2,500 in 2013, but in 2014, those numbers will likely rise to account for cost of living increases.
In 2014, you and your financial planner will see new information on your W-2 forms: a line for reporting the worth of your health care plan to the IRS. Because health care costs will be tracked yet not subject to taxation, the IRS will use this figure to apply credits or penalties as needed.
Copyright © 2013 CPA Services. All Rights Reserved.