10 Basic Tax To-Dos for the Rest of 2014

10 Basic Tax To-Dos for the Rest of 2014

Here are 10 things to consider as you weigh potential tax moves between now and the end of the year.

1. Make time to plan

Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There’s a real opportunity for tax savings when you can assess whether you’ll be paying taxes at a lower rate in one year than in the other. So, carve out some time.

2. Defer income

Consider any opportunities you have to defer income to 2015, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

3. Accelerate deductions

You might also look for opportunities to accelerate deductions into the 2014 tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, instead of paying them in early 2015, could make a difference on your 2014 return.

Note:  If you think you’ll be paying taxes at a higher rate next year, consider the benefits of taking the opposite tack–looking for ways to accelerate income into 2014, and possibly postponing deductions.

4. Know your limits

If your adjusted gross income (AGI) is more than $254,200 ($305,050 if married filing jointly, $152,525 if married filing separately, $279,650 if filing as head of household), your personal and dependent exemptions may be phased out, and your itemized deductions may be limited. If your 2014 AGI puts you in this range, consider any potential limitation on itemized deductions as you weigh any moves relating to timing deductions.

5. Factor in the AMT

If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end tax planning. For example, if you’re subject to the AMT in 2014, prepaying 2015 state and local taxes probably won’t help your 2014 tax situation, but could hurt your 2015 bottom line. Taking the time to determine whether you may be subject to AMT before you make any year-end moves can save you from making a costly mistake.

6.  Maximize retirement savings

Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) could reduce your 2014 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars, so there’s no immediate tax savings. But qualified distributions are completely free from federal income tax, making Roth retirement savings vehicles appealing for many.

7. Take required distributions

Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working and participating in an employer-sponsored plan). Take any  distributions by the date required–the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of the amount that should have been distributed.

8.  Know what’s changed

A host of popular tax provisions, commonly referred to as “tax extenders,” expired at the end of 2013. Among the provisions that are no longer available: deducting state and local sales taxes in lieu of state and local income taxes; the above-the-line deduction for qualified higher-education expenses; qualified charitable distributions (QCDs) from IRAs; and increased business expense and “bonus” depreciation rules.

9. Stay up-to-date

It’s always possible that legislation late in the year could retroactively extend some of the provisions above, or add new wrinkles–so stay informed.

10. Get help if you need it

There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who is able to evaluate your situation, keep you apprised of legislative changes, and help you determine if any year-end moves make sense for you.

IRS Updates Phone Scams Warning

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IRS Updates Phone Scams Warning

The IRS is again warning the public about phone scams that continue to claim victims all across the country. In these scams, thieves make unsolicited phone calls to their intended victims. Callers fraudulently claim to be from the IRS and demand immediate payment of taxes by a prepaid debit card or wire transfer. The callers are often hostile and abusive.

The Treasury Inspector General for Tax Administration has received 90,000 complaints about these scams. TIGTA estimates that thieves have stolen an estimated $5 million from about 1,100 victims. To avoid becoming a victim of these scams, you should know:

  • The IRS will always first contact you by mail if you owe taxes, not by phone.
  • The IRS never asks for credit, debit or prepaid card information over the phone.
  • The IRS never insists that you use a specific payment method to pay your tax.
  • The IRS never requests immediate payment over the telephone.
  • The IRS will always treat you professionally and courteously. 

Scammers may tell would-be victims that they owe money and that they must pay what they owe immediately. They may also tell them that they are entitled to a large refund. Other characteristics of these scams include:

  • Scammers use fake names and IRS badge numbers to identify themselves.
  • Scammers may know the last four digits of your Social Security number.
  • Scammers spoof caller ID to make the phone number appear as if the IRS is calling.
  • Scammers may send bogus IRS emails to victims to support their bogus calls.
  • Victims hear background noise of other calls to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up. Others soon call back pretending to be from the local police or DMV, and caller ID again supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. IRS employees can help you with a payment issue if you owe taxes.
  • If you know you don’t owe taxes or don’t think that you owe any taxes, then call and report the incident to TIGTA at 800-366-4484.
  • If scammers have tried this scam on you, you should also contact the Federal Trade Commission and use their “FTC  Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

The IRS encourages you to be vigilant against phone and email scams that use the IRS as a lure. Visit the genuine IRS website, IRS.gov, to learn how to report tax fraud and for more information on what you can do to avoid becoming a victim.

Additional Medicare Tax

Additional Medicare Tax

On Nov. 26, 2013, the IRS issued final regulations (TD 9645) implementing the Additional Medicare Tax as added by the Affordable Care Act (ACA). The Additional Medicare Tax applies to wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds. Employers are responsible for withholding the tax on wages and RRTA compensation in certain circumstances.

BASIC FAQs

1. When did Additional Medicare Tax start?

Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.

2. What is the rate of Additional Medicare Tax?

The rate is 0.9 percent.

3. When are individuals liable for Additional Medicare Tax?

An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

Filing Status

Threshold Amount

Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

4. What wages are subject to Additional Medicare Tax?

All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.

5. What Railroad Retirement Tax Act (RRTA) compensation is subject to Additional Medicare Tax?

All RRTA compensation that is currently subject to Medicare Tax is subject to Additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status. All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.

6. Are nonresident aliens and U.S. citizens living abroad subject to Additional Medicare Tax?

There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.

7. Will I also owe net investment income tax on my income that is subject to Additional Medicare Tax?

No. The tax imposed by section 1411 on an individual’s net investment income is not applicable to wages, RRTA compensation, or self-employment income. Thus, an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status. See more information on the Net Investment Income Tax.

INDIVIDUAL FAQs

Wages, RRTA Compensation, and Self-Employment Income

8. Will an individual owe Additional Medicare Tax on all wages, RRTA compensation and self-employment income or just the wages, RRTA compensation and self-employment income in excess of the threshold for the individual’s filing status?

An individual will owe Additional Medicare Tax on wages, compensation and self-employment income (and that of the individual’s spouse if married filing jointly) that exceed the applicable threshold for the individual’s filing status. Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss is not considered for purposes of this tax. RRTA compensation is separately compared to the threshold.

9. Are wages that are not paid in cash, such as fringe benefits, subject to Additional Medicare Tax?

Yes. The value of taxable wages not paid in cash, such as noncash fringe benefits, are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold. Noncash wages are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.

10. Are tips subject to Additional Medicare Tax?

Yes. Tips are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the    individual’s applicable threshold. Tips are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.

Withholding and Estimated Tax Payments

(See Publication 505, Tax Withholding and Estimated Tax, for more information)

11. Will Additional Medicare Tax be withheld from an individual’s wages?

An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual’s filing status or wages paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income. In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate.

12. Will Additional Medicare Tax be withheld from an individual’s compensation subject to Railroad Retirement Tax Act (RRTA) taxes?

An employer must withhold Additional Medicare Tax from RRTA compensation it pays to an individual in excess of $200,000 in a calendar year without regard to the individual’s filing status or compensation paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income. In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate.

Net Investment Income Tax (NIIT)

 

Basics of the Net Investment Income Tax (NIIT)

The Net Investment Income Tax is  imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013.

Individuals who are subject to the Net Investment Income Tax

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status

Threshold Amount

Married filing jointly

$250,000

Married filing   separately

$125,000

Single

$200,000

Head of household   (with qualifying person)

$200,000

Qualifying widow(er)   with dependent child

$250,000

Taxpayers should be aware that these threshold amounts are not indexed for inflation.

If you are an individual who is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.

For the purpose of  the Net Investment Income Tax, the modified adjusted gross income is the adjusted gross income (Form 1040, Line 37),  increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) for amounts described in section 911(a)(1). In the case of taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), they may have additional adjustments to their AGI. See section 1.1411-10(e) of the final regulations.

Individuals who are not subject to the Net Investment Income Tax

Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under section 6013(g) or 6013(h) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the final regulations provide these couples special rules and a corresponding section 6013(g)/(h) election for the NIIT.

A dual-resident individual, within the meaning of regulation §301.7701(b)-7(a)(1), who determines that he or she is a resident of a foreign country for tax purposes pursuant to an income tax treaty between the United States and that foreign country and claims benefits of the treaty as a nonresident of the United States is considered a NRA for purposes of the NIIT.

A dual-status individual, who is a resident of the United States for part of the year and a NRA for the other part of the year, is subject to the NIIT only with respect to the portion of the year during which the individual is a United States resident. The threshold amount (described in # 3 above) is not reduced or prorated for a dual-status resident.

Estates and trusts might also be subject to the Net Investment Income Tax

Estates and trusts are subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year under section 1(e) (for tax year 2013, this threshold amount is $11,950). Generally, the threshold amount for the upcoming year is updated by IRS each fall in a revenue procedure. For 2014, the threshold amount is $12,150 (See Rev. Proc. 2013-35).

There are special computational rules for certain unique types of trusts, such as Qualified Funeral Trusts, Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the final regulations (see # 20 below).

Estates and trusts that are not subject to the Net Investment Income Tax

The following trusts are not subject to the Net Investment Income Tax:

  1. Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under section 501, and Charitable Remainder Trusts exempt from tax under section 664).
  2. A trust or decedent’s estate in which all of the unexpired interests are devoted to one or more of the purposes described in section 170(c)(2)(B).
  3. Trusts that are classified as “grantor trusts” under sections 671-679.
  4. Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).
  5. Electing Alaska Native Settlement Trusts.
  6. Perpetual Care (Cemetery) Trusts.

Net Investment Income includes the following:

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #13 below).

Types of income that are not Net Investment Income

Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)).

Gains that are included in Net Investment Income

To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:

  1. Gains from the sale of stocks, bonds, and mutual funds.
  2. Capital gain distributions from mutual funds.
  3. Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
  4. Gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner). See section 1.1411-7 of the 2013 proposed regulations.

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes.

The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

Example 1: A, a single filer, earns $210,000 in wages and sells his principal residence that he has owned and resided in for the last 10 years for $420,000. A’s cost basis in the home is $200,000. A’s realized gain on the sale is $220,000. Under section 121, A may exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining Net Investment Income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of A’s home.

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%).

Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.

Net Investment Income includes interest, dividends and capital gains of children that are reported on the parents Form 1040 (Form 8814)

The amounts of Net Investment Income that are included on your Form 1040 by reason of Form 8814 are included in calculating your Net Investment Income. However, the calculation of your Net Investment Income does not include (a) amounts excluded from your Form 1040 due to the threshold amounts on Form 8814 and (b) amounts attributable to Alaska Permanent Fund Dividends.

Deductible investment expenses in computing NII

In order to arrive at Net Investment Income, Gross Investment Income (items described in items 7-11 above) is reduced by deductions that are properly allocable to items of Gross Investment Income. Examples of deductions, a portion of which may be properly allocable to Gross Investment Income, include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.

You may be subject to both the 3.8% Net Investment Income Tax and the additional .9% Medicare taxes, but not on the same type of income.

The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income. See more information on the Additional Medicare Tax.

How the Net Investment Income Tax is Reported and Paid

Individuals, estates, and trusts will use Form 8960 to compute their Net Investment Income Tax.

For individuals, the tax will be reported on, and paid with, the Form 1040. For estates and trusts, the tax will be reported on, and paid with, the Form 1041.

The Net Investment Income Tax is subject to the estimated tax provisions

Individuals, estates and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For more information on tax withholding and estimated tax, see Publication 505, Tax withholding and Estimated Tax.

Tax credits may reduce the NIIT liability

Any federal income tax credit that may be used to offset a tax liability imposed by subtitle A of the Code may be used to offset the NII. However, if the tax credit is allowed only against the tax imposed by chapter 1 of the Code (regular income tax), those credits may not reduce the NIIT. For example, foreign income tax credits (sections 27(a) and 901(a)) and the general business credit (section 38) are allowed as credits only against the tax imposed by chapter 1 of the Code, and therefore may not be used to reduce your NIIT liability. If you take foreign income taxes as an income tax deduction (versus a tax credit), some (or all) of the deduction amount may deducted against NII.

The NIIT tax does not have to be withheld from wages, but you may request that additional income tax be withheld from your wages.

Examples of the Calculation of the Net Investment Income Tax

a. Single taxpayer with income less than the statutory threshold.

Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

b. Single taxpayer with income greater than the statutory threshold.

Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received $90,000 from a passive partnership interest, which is considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000.

Taxpayer’s modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000.

The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).

Additional Information

Additional  information about the Net Investment Income Tax

You can find additional information about the NIIT in the 2013 final regulations and in a new 2013 proposed regulation published on Dec. 2, 2013.

For taxable years beginning before Jan. 1, 2014 (e.g., calendar year 2013), taxpayers may rely on the 2012 proposed regulations (published on Dec. 5, 2012), the 2013 proposed regulations (published on Dec. 2, 2013), or the 2013 final regulations (published on Dec. 2, 2013) for purposes of completing Form 8960. However, to the extent that taxpayers take a position in a taxable year beginning before Jan. 1, 2014 that is inconsistent with the final regulations, and such position affects the treatment of one or more items in a taxable year beginning after Dec. 31, 2013, then such taxpayer must make reasonable adjustments to ensure that their Net Investment Income Tax liability in the taxable years beginning after Dec. 31, 2013 is not inappropriately distorted. For example, reasonable adjustments may be required to ensure that no item of income or deduction is taken into account in computing net investment income more than once, and that carryforwards, basis adjustments and other similar items are adjusted appropriately.

FILE YOUR 2010 TAX RETURN NOW AND STILL RECEIVE YOUR REFUNDS

If the IRS owes you a refund, you’re in a great situation. First, the good news. There is no late filing penalty if you are due a refund. Now, the bad news. You have three years from the original due date to file a tax return and still get a refund. This is called the Statute of Limitations for claiming a refund.

What that means, in practical terms, is that right now you can still file your 2010 tax return and get a refund. You have until April 15, 2014, to file your 2010 return. If you file your 2010 return on April 16, 2014 you may kiss your refund goodbye, because it is gone forever.

Now, if you need to file tax returns earlier than 2010, you should still file those returns at your earliest convenience. You may be thinking, why should I file if I am not getting a refund? Because, the IRS may think that you owe taxes. And the only way to prevent them from collecting more tax is to file a return.

So, bottom line, you should file any and all late tax returns. You will get refund checks if the return is less than 3 years late. And you will prevent collections activity on the earlier tax years.

Obama Health Law: Failure To Comply Gets Costlier by 2016

One of the few things most Americans know about the Affordable Care Act, according to a new Kaiser Family Foundation poll, http://kff.org/health-reform/poll-finding/kaiser-health-tracking-poll-september-2013/, is that it imposes a penalty on those who fail to carry health coverage. Still, they may not realize the penalty gets a lot stiffer after 2014, potentially changing the calculation of whether it’s worth going without coverage.

Someone not insured by the end of the first quarter of 2014 will be assessed a penalty of $95 per adult and $47.50 per child or 1% of household income, whichever is higher.

The Internal Revenue Service will compute the 1% of household income penalty on any income in excess of the tax filing threshold, which would be about $10,000 next year. So a person with income of $50,000 would pay the 1% penalty on $40,000 of income, or $400.

In 2015, the penalties rise to $325 per person ($162.50 per child) or 2% of income. The following year, they rise to $695 per person ($347.50 per child) or 2.5% of income. In following years, the increase is tied to the rise in the cost-of-living rate.

No matter how much one’s income, the fine is capped at a level roughly equal to the cost of a basic policy available on one of the new health-insurance exchanges opening Tuesday.

All this means that for “the young invincible”, who is sure that they won’t get sick and don’t want to pay for health coverage, may find it advantageous in 2014 to pay the $95 penalty and take their chances. But by 2016, it will likely make more financial sense to go on the exchange and buy an inexpensive policy than to pay a large penalty and get nothing.

For most people, the penalty isn’t an issue because they already have qualifying health coverage from their employer or from a government program like Medicare.

The IRS will collect penalties but the agency is somewhat constrained in how it will be able to go after the money. Consumers won’t be subject to criminal penalties.

The health law prohibits the government from using liens or seizure of property to collect payments. The IRS hasn’t provided detailed guidance yet, but the agency has said that if someone owes a penalty, it “may offset that liability against any tax refund” due in future years.

Some people will be exempted from the health insurance requirement, including federally recognized Indian tribe members, prisoners and some religious groups. States can also provide hardship exemptions to individuals or families.

4 Tax Breaks Every College Student Should Know About

With three of my grandchildren currently attending college, I thought this to be a good time to revisit some of the most lucrative tax breaks out there for college students and/or their parent(s).

In the last three decades, college enrollment has increased 11%, while tuition has shot up 200%, a recent report finds (see http://www.nerdwallet.com/blog/investing/2013/73-retirement-norm-millennials/) Today’s college students will graduate into a mediocre job market with median student loan debt of $23,300.00 (see http://www.businessinsider.com/millennials-may-not-be-able-to-retire-until-age-73-2013-10).

Facing such bad odds and with the national student debt nearing $1 trillion, it has never been more important for the college students as well as recent grads to keep as much of their earnings as possible.  Yet the US Government Accountability Office  (see http://www.gao.gov/assets/600/590970.pdf) reported that Americans left behind nearly $800 million in college tuition tax benefits back in 2009 — an average of $466 per person.

The 4 Tax Breaks:

The American Opportunity Credit. Students are eligible to claim up to $2,500 for the first four years of post-secondary education. And since 40% of the credit is refundable, that means students can get back up to $1,000 on their refund — even if they don’t owe any taxes, according to the IRS. What qualifies: Tuition and fees, course-related books, supplies, and equipment. Income: Couples filing jointly who earn less than $160,000; single-filers who earn less than $80,000.

The Lifetime Learning Credit. Students earning less than $60,000 (single-filers) or $120,000 (married, filing jointly), can claim up to $2,000 education-related expenses.

Tuition and fee deductions. Like the American Opportunity Credit, students earning less than $80,000 (single) or $160,000 (married, filing jointly) can deduct up to $4,000 in tuition and fees on their annual tax returns. Use it while you can — this tax break is set to expire at the end of 2013 unless lawmakers extend it.

Student loan interest deduction. If you’ve taken out a federal or private student loan, you’re eligible to deduct up to $2,500 worth of interest paid on the loan as an “above-the-line” exclusion from your income. You don’t have to itemize your deductions in order to claim it.

Note:  College students can only claim one of the above tax credits per year, but parents supporting more than one child in college can claim tax credits on a per-student basis.

2014 Inflation Adjustments

IR-2013-87, Oct. 31, 2013

WASHINGTON — For tax year 2014, the Internal Revenue Service announced today annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2013-35 provides details about these annual adjustments.

The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts.

  • The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.
  • The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
  • The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the 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.)
  • The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).
  • The maximum Earned Income Credit amount is $6,143 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
  • Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.
  • The annual exclusion for gifts remains at $14,000 for 2014.
  • The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.
  • The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
  • The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2013-35, which will be published in Internal Revenue Bulletin 2013-47 on Nov. 18, 2013.

Tips if You Are Selling Your Home (Principal Residence)

If you’re selling your main home sometime this year, here are some helpful tips for you. Even if you make a profit from the sale of your home, you may not have to report it as income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. If you sell your home at a gain, you may be able to exclude part or all of the profit from your income. This rule generally applies if you’ve owned and used the property as your main home for at least two out of the five years before the date of sale.

2. You normally can exclude up to $250,000 of the gain from your income ($500,000 on a joint return). This excluded gain is also not subject to the new Net Investment Income Tax, which is effective in 2013. (See my blog posted on August 13, 2013)

3. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.

4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. 5. You’ll also have to report the sale if you received a Form 1099-S, Proceeds From Real Estate Transactions.

6. Generally, you can exclude a gain from the sale of only one main home per two-year period.   7. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.

8. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523 for details.

9. You cannot deduct a loss from the sale of your main home. This is not the only area where you get to pay tax on the gain, but do not get to exclude the loss!

10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822, Change of Address, to notify the IRS.

IRS Releases Draft of Form 8960 Net Investment Income Tax, the 3.8% Medicare Tax for 2013

Posted on August 13 2013 by Alice

On August 7, 2013 the IRS released the first draft of thehttp://www.irs.gov/pub/irs-dft/f8960–dft.pdf. Form 8960 will report the new 3.8% Medicare tax on net investment income and will be filed with the 2013 Form 1040 U.S. Individual Income Tax Return and 2013 Form 1041 U.S. Income Tax Return for Estates and Trusts.

Beginning this year, individuals, estates and trusts whose modified AGI (adjusted gross income) exceed the threshold amount will be subject to the new 3.8% Net Investment Income Tax (NIIT). The threshold amounts are:

Married Filing Joint – $250,000
Married Filing Separate – $125,000
Single/Head of Household – $200,000
Estates/Trusts – $11,650

Net investment income for purposes of the NIIT calculation includes dividends, interest, rent, royalties, commercial annuities, net capital gains on assets that produce net investment income and passive trade or business income as well as income from financial instrument trading.  Net investment income is the income after deductions for expenses that are “properly allocable” to the income.

Investment income does not include wages, active business income, pension/IRA distributions, or tax-exempt income.

The IRS is accepting comments on Form 8960 until September 27th.  The instructions for Form 8960 will be released later this year