Tax News Update for 2014

Pronto Tax School Newsletter

Renew CTEC.com | Tax News Update | January 2014

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 Tax Update for Tax Year 2013

 

Federal Tax Update for Tax Year 2013

Let’s dive right in!

Due to the three week government shutdown in 2013 the FIRST DAY THAT INDIVIDUAL RETURNS CAN BE ELECTRONICALLY FILED IS JANUARY 31, 2014. This date is actually one day later than the previous year’s start date.

Keep in mind then that the IRS has continued to COMPRESS tax season and at this point if you only count days where IRS is processing tax returns tax season is only 75 DAYS.

With this in mind, tax preparers should consider:

  1. nStaying healthy
  2. nScheduling appointments in the morning before regular office hours
  3. nExtended hours when it’s busy

For business returns first day IRS is processing is Monday, January 13, 2014.

Most Bush era tax cuts were extended into tax year 2013 with the one major exception being the end of the “payroll tax holiday”. The employee share of Social Security tax has returned to 7.65% from the 6.2% which was in effect in 2012 and 2011. The Self-Employment Tax is back to 15.3% so you will see taxes for self-employed people go up.

There is a new tax rate of 39.6% which will be imposed on individuals with a taxable income of more than $400,000 a year, $425,000 for those who file head of household and $450,000 for married filing joint filers.

In general it is fair to say that a wide variety of tax increases have been imposed on individuals who earn above $200,000 per year.

The maximum capital gains rate will increase from 15% to 20% for individuals taxed at the 39.6% rate. However, individuals in the top tax bracket of 39.6% will pay 20% capital gains rate.

For 2013, the wage base for Social Security tax has been increased from $110,100 to $113,700. Beyond $113,700 of earnings, the taxpayer does not have to pay any more Social Security tax on his or her earnings. However, the Medicare tax of 2.9 percent—1.45 percent for the employee plus 1.45 percent for the employer—is applied to all earnings without limitation.

Starting in 2013, higher income taxpayers will see a new 3.8 percent Medicare tax on unearned income including rental income, dividends, capital gains, and interest income. For unmarried taxpayers, this new Medicare tax on unearned income “kicks in” once the taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds $200,000. For married filing jointly tax returns, the 3.8 Medicare tax on unearned income starts once MAGI goes over $250,000.

Starting in 2013, upper income earners (defined as Single over $200,000 in wages & married filing jointly over $250,000 in wages) will pay an extra 0.9 percent Medicare “surtax” on all their earnings above those designated amounts. For example, a taxpayer who is an employee would see her Medicare tax rate go from 1.45 to 2.35 percent on any income above the designated amounts. High-earning self-employed taxpayers are also affected by this extra 0.9 Medicare surtax.

The taxation of qualified dividends at long-term capital gain rates on the federal return was made permanent.

In 2013 the Exemption Allowance is $3,900.

The exemption phase-out and the itemized deduction phase-out have returned.

The basic computation is the same as in previous years but there are now different threshold amounts.

Exemption amounts are phased-out by 2% for each $2,500 (or fraction thereof) by which the taxpayer’s AGI exceeds the threshold amount.

Itemized deductions are reduced by the lesser of:

  • 3% of the excess AGI over the threshold amount; or
  • 80% of the itemized deductions otherwise allowable.

The threshold amounts are as follows:

Single                                                     $250,000

Head of Household                                 $275,000

Married filing joint, surviving spouse       $300,000            

Married filing separate                           $150,000

 

2013 Standard Deduction:

 

Filing Status

Standard Deduction

Joint & Qualifying Widow(er)

$12,200*

Head of Household

$8,950*

Single & Married Separately

$6,100*

           

            *Additional amount for those at least 65 and/or blind

                        Joint & QW                       $1,200     

                        All others                         $1,500

 

                                   

Dependent Standard Deduction

Base Amount

$1,000

Additional Amount

$300

                        (adds to earned income)

 

The tax tables for 2013 have been adjusted upwards to account for inflation.

 

Other provisions to be aware of for this year:

 

  • The 60 month limitation on student loan interest is permanently gone;
  • The maximum credit amount for the Adoption Credit will be $12,770 for 2013
  • For 2013 the estate tax exclusion is $5,250,000.

 

Other miscellaneous provisions that are extended through 2013:

 

  • The discharge of qualified principal residence exclusion;
  • $250 above-the-line teacher deduction;
  • Mortgage insurance premiums treated as residence interest;
  • Deduction for state and local taxes;
  • Above-the-line deduction for tuition;
  • The 179 expense deduction is $500,000.
  • Nonbusiness energy improvements to principal residence ($500 cap);
  • 50% bonus depreciation.

 

Provisions extended through 2017:

 

  • The American Opportunity Tax Credit;
  • The Earned Income Tax Credit;
  • The Child Tax Credit.

 

The maximum deductible contribution to an Individual Retirement Account (IRA) is now $5,500 per taxpayer for 2013, with a $1,000 “catch-up contribution” for any taxpayer age 50 or over.

 

The contribution limit for 401K, 403b, and other elective deferral qualified retirement plans has been increased from $17,000 to $17,500, with an additional $5,500 catch-up contribution allowed for taxpayers age 50 or over.

 

The Alternative Minimum Tax exemption has been made permanent and is adjusted for inflation each year. The exemption amounts for 2013 are:

 

Filling Status

AMT Exemption amounts

Married Joint & Qualifying Widow(er)

$80,800

Single & Head of Household

$51,900

Married Filing Separately

$40,400

 

There is a new simplified method for the Home Office Deduction.

 

This computation is optional. Instead of using Form 8829, multiply $5 x the number of square feet in office (located on bottom of page 1 of Schedule C).

 

Itemized Medical Deduction Threshold Percentage:

 

Threshold percentage is now 10% for taxpayers under the age of 65 but stays at 7.5% for those 65 or older; this is a tax increase for people who pay significant medical expenses out of pocket and wish to itemize on Schedule A.

 

IRS Competency Test and Other Miscellaneous Tax Preparer Information:

 

  • On Friday, January 18, 2013, the United States District Court for the District of Columbia enjoined the Internal Revenue Service from enforcing the regulatory requirements for registered tax return preparers. In accordance with this order, tax return preparers covered by this program are not required to complete competency testing or secure continuing education.
  • On Friday, February 1, 2013, the court modified its order to clarify that the order does not affect the requirement for all paid tax return preparers to obtain a preparer tax identification number (PTIN).
  • The IRS filed an appeal with the district court on March 29, 2013, asking for a reversal of the above ruling.
  • The end result, as of this writing, is that enrolled agents and all those who are preparing taxes for compensation (with some exceptions) will need to have a current PTIN. The PTIN must be renewed by December 31 of each year. The IRS user fee for PTIN renewal will remain the same at $63.
  • A final court decision is still pending on the IRS request for expanded regulatory

authority.

 

Same Sex Marriage:

 

Since June 26, 2013 same sex couples legally married in California are taxed in the same manner as legally married opposite sex couples. This means that same sex couples married in a state that allows same sex marriage (including California) can file Married Filing Jointly on both the federal and state tax returns.

This rule is effective for all returns on or after September 16, 2013, regardless of what year the tax returns are for. For instance, if beneficial, amended returns that fall within the time limitation (three years from due date) may be filed for previous years.

A taxpayer who is lawfully married in one state will continue to be lawfully married for federal tax purposes if that taxpayer moves to a state that does not recognize same sex marriage.

 

Obamacare and the 2013 Tax Return:

 

We can expect clients to have a lot of questions about ObamaCare and we must handle these questions wisely. Generally speaking, you will want to think about what approach you are taking. Some preparers are looking at this as an “extra income” opportunity to either offer consulting or to actually offer health insurance; CrossLink software, for instance, has been marketing health insurance as an added income possibility for tax preparers.

Unfortunately, the “roll out” of this new law has been a complete disaster and with a compressed tax season, we’d humbly advise you to be careful about spending extensive time on “unbilled” consulting about a topic in which you may not be an expert—especially when the government has continued to “move the goalposts.”

The overall premise of Obamacare is that most individuals not covered by an employee sponsored health plan, Medicaid, Medicare or other public insurance plans would purchase and comply with an approved private insurance policy or pay a penalty. Certain exceptions would apply to this.

The big thing for us to realize as we prepare 2013 tax returns—and to assure clients—is that the 2013 tax return is in no way affected by ObamaCare. There is no fine or tax, there is no credit that can be obtained, there is nothing related to ObamaCare on the 2013 tax return (other than all the extra taxes we have outlined above). The tax return that will be affected is the 2014 tax return.

 

Knowing this fact will give us some “breathing room” in discussing this issue with clients.

 

Potential benefits of the new law include:

  • Children to age 26 may be covered on parents’ medical policy (they do not have to be

dependents).

  • Pre-existing conditions no longer disqualify a child from obtaining health insurance.
  • Rescinding of coverage is prohibited
  • Lifetime maximums on health coverage are for the most part eliminated.
  • Beginning on October 1, 2013, affordable health coverage will generally become available January 1, 2014 (as we all know, this sign-up process has had its share of difficulties).
  • Preventative care visits without copays or deductibles are encouraged.
  • In 2014, the Medicaid program will be expanded to include children, parents, and childless adults who fall within 133 percent of the federal poverty level.

 

The Premium Tax Credit:

  • For tax year 2014, individual or families whose income falls between 100% – 400% of the FPL (federal poverty level) may qualify for a subsidy to obtain health insurance.
  • Credit can be applied toward premium payment to the exchange in advance of filing the credit. Employees with employee sponsored plan would not qualify for credit. *If income rises or falls an adjustment might be necessary on tax return.*
  • Credit would be paid directly to the health insurance companies, not to taxpayers.
  • Beginning in 2014, individuals who do not have health coverage will be assessed a penalty at the time of filing their 2014 tax return. Taxpayers have until March 31, 2014 to enroll in the program for 2014.
  • The individual penalty for not having health coverage in 2014 will be $95 per individual on the tax return (or a maximum of $285 per family). In 2015 the penalty will increase to $325 ($975 family) and in 2016 the penalty will be $695 ($2085 family). The cap on the penalty is three adults. Children sixteen and under are counted as one-half an adult.
  • Penalty is either the “fixed” amount shown above OR 1% of Adjusted Gross Income, whichever is greater, so higher income individuals would pay higher penalties.
  • Information from third-party health insurance companies will provide the IRS with documentation to confirm or deny the existence of health coverage for the year in question.
  • No penalty is assessed if taxpayers maintain coverage for at least nine months during the tax year (thus, the March 31, 2014 deadline for enrollment). There is no interest assessment on not paying the penalty nor is the penalty subject to lien, seizures or civil or criminal penalties. The only recourse for the IRS is to send a letter to taxpayer or to offset a taxpayer’s 2014 refund.
  • In 2014, health coverage will be available from a state or federal exchange

(in California, coveredca.com).

           Four levels of coverage are available:

  1. oBronze level – will pay 60 percent of the benefits covered under the plan.
  2. oSilver level – will pay 70 percent.
  3. oGold level – will pay 80 percent.
  4. oPlatinum – will pay 90 percent.

 

There is also a Small Business Health Care Tax Credit that may be available to small businesses who offer health insurance to their employees:

  • Form 8941 (Credit for Small Employer Health Insurance Premiums) is completed to determine if business qualifies.
  • Same plan must be offered to all employees.
  • Owners and their families are excluded, along with seasonal employees and those who opt out.
  • Employers must pay at least 50% percent of premium cost.
  • Credit is limited to twenty full-time equivalent employees averaging less than $50,000 per year.
  • In 2013 the maximum credit is 35 percent of employee paid premiums. In 2014 the percentage rises to 50 percent.
  • The credit is refundable, but it can be applied against tax due of Form 941. This credit was effective in 2010.

 

Immigration:

 

  1. nSomething to keep in mind this year is the potential impact of immigration reform. Congress has been in a sort of “holding pattern” but there has been some movement towards legalization. We need to be ready for questions from people who call or walk into the office and want to do taxes for the first time.
  2. nImmigration-related issues to be aware of:
    1. oWhat is the purpose of an ITIN
    2. oHow to fill out an ITIN application
    3. oWhat documents are required to obtain an ITIN (use document as a “take-away” for client”)
    4. oSelf-employed undocumented immigrants who work “in cash.” How to explain the process and knowing the numbers ahead of time so that they are not expecting refunds
    5. oBeware of “filing status” issues that can adversely affect immigration applications down the road, i.e. working spouse filing Head of Household / unmarried and then down the line non-working spouse not accepted as spouse for immigration
    6. oMake sure to ***charge a decent amount*** for every ITIN package that we do. These clients frequently come back to the office numerous times and we cannot afford to do all that free work.
    7. oRemind the client to always come into the office with any letter received by IRS, otherwise if no response application will be rejected and have to do everything all over again
    8. oMust be original documents, no notarized documents anymore
    9. oNo Child Tax Credit if “substantial presence” test is not met, i.e. child must live in the U.S. to receive Child Tax Credit

 

 

CALIFORNIA STATE TAX UPDATE

 

Personal Exemption Credit for Single, Married Filing Separately, and Head of Household is $106.00.

Personal Exemption Credit forMarried Filing Jointly, Qualifying Widow(er) is $212.00

Blind? Add an extra $104. Age 65 or over? Add an extra $106.

Dependent Exemption Credit of $326.00.

Phase-out of Exemption Credits: Reduced by $6 for each $2,500 ($1,250 for Married Filing separately) in excess of federal AGI amounts of:

 

Filing Status

Federal AGI

Single; Married, filing separate

$172,615

Head of Household

$258,927

Married, filing joint: Qualifying Widower

$345,235

 

2013 California Standard Deduction Amounts:

 

Filing Status

CA Standard Deduction

Married Filing Jointly, Head of Household

$7,812

Single & Married Filing Separately

$3,906

Minimum standard deduction for dependents

$950

 

Itemized Deductions: Reduced by the lesser 6 percent of the excess of the of the taxpayer’s federal AGI over the threshold amount or 80 percent of the amount of itemized deductions otherwise allowed for the taxable year. Threshold amounts are:

 

Filing Status

Federal AGI

Single, Married Filing Separate

$172,615

Head of Household

$258,927

Married Joint or Qualifying Widow(er)

$345,235

 

State Disability Insurance (SDI) Rate for 2013 is 1 percent of wages. The “wage base” for SDI—the amount of wages subject to SDI tax—has been increased for 2013 to $100,880.

 

On California returns there are no further homebuyer credits to carryover.

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