Many Tax Amounts Inflation-Adjusted Upward for 2014
The amounts specified in dozens of federal tax provisions will be higher in 2014 than 2013 due to legally required inflation adjustments, the IRS has announced. These new dollar amounts apply to returns filed for the 2014 tax year, which will be filed by most taxpayers in early 2015.
Year-end tax planning often includes decisions about whether to accelerate income and expenses into the current year or defer them into the next tax year. In order to make these determinations, it is necessary to have a ballpark sense of whether your tax liability will be higher or lower next year. The annual adjustments will help you gauge the amount of deductions you can claim and your tax bracket for the coming year.
The following are adjustments that are likely to benefit nearly every taxpayer:
Tax-Bracket Amounts: The income thresholds for each tax bracket are increased; the amount of the increase depends upon the filing status (e.g., married filing jointly, single, head of household or married, filing separately). For example, for a married couple filing a joint return, the 2014 taxable-income threshold for the 25-percent tax bracket kicks in at $73,800, up from $72,500 in 2013.
- Exemption Amounts: Each personal and dependent exemption claimed on a 2014 return will be worth $3,950, up $50 from 2013. The personal exemption amount phases out starting at $305,050 for joint filers and completely phases out at $427,550. For single filers, the phase out range is $254,200 to $$376,700.
- Standard Deduction Amounts: Nearly two-thirds of taxpayers opt for the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes. Those taxpayers will benefit from a higher standard deduction amount in 2014.
- Married Couples, filing joint returns: $12,400 for 2014, up $200;
- Singles and Married, filing separately: $6,200 for 2014, up $100;
- Head of Household: $9,100 for 2013, up $150; and
- Dependents (those who may be claimed on another person’s tax return, but who file their own return): the greater of (1)$1,000 or (2) the person’s earned income plus $350.
- The additional standard deduction for the blind and senior citizens remains at $1,200 for married individuals and $1,550 for singles and heads of household.
- Limit on itemized deductions: Reduced itemized deductions begin at $305,050 for joint filers and $254,200 for single filers.
The 2014 taxable-income threshold for the 39.6-percent tax bracket kicks in at $457,600 for joint filers ($406,750 for single filers),
In addition to these nearly universal provisions, numerous deductions, credits and related phase-outs also have been adjusted. Among the more popular of these are
- Education-Related Provisions: The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $108,000 for joint filers, up from $107,000, and $54,000 for singles and heads of household, up from $53,000.
The $2,500 maximum deduction for interest paid on student loans begins to phase out for married taxpayers filing joint returns at $130,000 and phases out completely at $160,000, an increase of $5,000 from the phase out limits for tax year 2013. For single filers, the maximum deduction begins to phase out at $65,000 and phases out completely at $80,000 (also an increase of $5,000 from the phase out limits for tax year 2013).
- Kiddie Tax Provisions: The amount used to reduce the net unearned income reported on the child's return subject to the "Kiddie Tax" is $1,000. The same amount is used to test whether the child’s gross income can be included in the parent’s gross income.
- Earned Income Credit: For tax year 2014, the maximum earned income tax credit (EITC) for low- and moderate-income workers and working families rises to $6,143, up from $6,044 in 2013. The maximum income limit for the EITC rises to $52,427, up from $51,567 in 2013.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
- For 2014, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2013 amounts.
- Single coverage: minimum annual deductible, $2,200; maximum annual deductible, $3,250; and maximum annual out-of-pocket expenses, $4,350.
- Family coverage: minimum annual deductible, $4,350; maximum annual deductible, $6,550, and maximum annual out-of-pocket expenses, $8,000.
For those who wish to see all the inflation-adjusted rates, you can find Revenue Procedure 2013-35 on the IRS website. This would also be a good opportunity to schedule a meeting with your tax professional to discuss year-end tax strategies to minimize your tax liability to the fullest extent possible.