Important 2014 Tax Developments

by Pessin Katz Law, P.A.
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The list is not intended to be exhaustive.

Income:                        

  • IRS rules that incentives to health care professionals and hospitals for using electronic records are income to those receiving the incentives.   
  • We await FICA guidance from the IRS on employers’ treatment of tips and service charges.   
  • The maximum fair market value (FMV) for 2014 for which the fleet-average valuation method can be used is $21,300 for a passenger auto and $22,600 for a truck or van.    (Employers maintaining a fleet of at least 20 automobiles can value the FMV of each automobile as equal to the average value of the entire fleet. The fleet-average valuation rule cannot be used if the value of any vehicle in the fleet exceeds these FMVs.)
  • Using the mileage allowance rate, an employer may value the personal use of its vehicles for inclusion in an employee’s income and wages.  The maximum FMV inclusion for 2014 is $16,000 for passenger autos and $17,300 for a truck or van.   
  • An employee can exclude up to $250 per month of employer-provided qualified parking benefits, and $130 per month for the combined value of transit passes and transportation in a commuter highway vehicle.
  • The per-diem dollar threshold in computing the limits for the exclusion of benefits   from long-term care insurance is $330 for 2014.   

Business Expenses and Deductions:

  • For 2014, the dollar limitations applicable to a high deductible health plan (HDHP) for an Archer medical savings account (“MSA”) purposes are adjusted.
  • For 2014, the dollar amounts defining and limiting deductible contributions to a High Deductible Health Plan for Health Savings Account purposes are adjusted.
  • The standard mileage rate for business travel is 56¢ for 2014 (down from 56.5¢ for 2013).
  • The moving expense deduction for 2014 is 23.5¢ per-mile (down from 24¢ in 2013).   

Education Tax Incentives:

  • The American Opportunity Tax Credit for higher education expenses is extended through 2017.
  • For 2014, the Lifetime Learning credit phases out over higher levels of modified       AGI.
  • The exclusion for employer-provided education assistance (including assistance for graduate-level courses) is now “permanent”.
  • The 60-month limitation and higher phase-out amounts are made “permanent” for the student loan interest deduction.   
  • The deduction for interest paid on qualified higher education loans in 2014 phases out ratably for taxpayers with modified Adjusted Gross Income between $65,000 and $80,000 ($130,000 and $160,000 for joint returns).   

Sales & Exchanges:

  • The tax-free exchange of a life insurance contract or an annuity applies to beneficiaries after the death of the owner.
  • State treatment of property as real or personal is not determinative for like-kind exchange purposes.

Withholding (FICA in particular):

  • A worker may be both an employee and an independent contractor for the same company under certain circumstances.   
  • IRS revised Form 8952 so it now applies to the misclassified worker settlement program.
  • Settlements paid for age discrimination will be treated as wages for FICA purposes.
  • The Supreme Court is to decide whether severance pay is subject to FICA.
  • The voluntary withholding rate on unemployment benefits remains at 10% “permanently”.   
  • For 2014, an employee who can be claimed as a dependent on another’s return cannot claim an exemption from withholding if income exceeds $1,000 and includes more than $350 of unearned income.
  • For 2014, the “nannie tax” will be subject to FICA at $1,900.   

Individual Tax Computation:

  • The wage base for computing Social Security tax (OASDI) in 2014 increased to $117,000 from $113,700 in 2013.
  • For 2013 and later years, the above-the-line deduction for self-employment tax is       50% of all self-employment tax.   
  • The standard deduction amounts for 2014 are: $12,400 for joint filers and surviving spouses; $9,100 for heads of household; $6,200 for singles; and $6,200 for marrieds filing separately. Also, for 2014, the basic standard deduction of individuals who can be claimed as dependents by another taxpayer cannot exceed the greater of (a) $1,000 or (b) $350 plus the individual’s earned income; and, it cannot be more than the regular basic standard deduction amount shown above ($6,200 for 2014).   
  • The overall limitation on itemized deductions is restored.   
  • The personal exemption amount is $3,950 for 2014.
  • For 2014, and later years, the personal exemption phaseout applies at increased levels.   
  • The tax rates on individuals’ incomes include a seventh, higher, tax bracket. The tax rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
  • For purposes of the “kiddie tax”, the parents’ highest tax rate applies to a child’s unearned income over $2,000 for 2014.   

Alternative Minimum Tax (“AMT”):

  • The statutory amount that is part of the calculation of tentative minimum tax, which is adjusted for inflation for any tax year beginning in 2013 and thereafter is $182,500 for 2014.
  • Increased individual AMT exemption amounts apply for tax years beginning in 2013 and thereafter.
  • For estates and trusts, the AMT exemption amount for tax years beginning in 2014 is adjusted as is the income threshold for elimination of the AMT exemption. (No exemption is available when AMT income reaches $172,250 for 2014).
  • The AMT exemption amounts and phase-out of exemption amounts are adjusted for inflation for any tax year beginning in 2013 and thereafter.

Corporate Tax Computation & S Corporations:

  • Accumulated earnings tax rate increases to 20% for tax years beginning in 2013 and   thereafter.   
  • Personal holding company penalty tax rate increases to 20% for tax years beginning in 2013 and thereafter.   
  • The IRS provides new simplified methods for taxpayers to request relief for late S corporation and related elections.
  • The IRS privately rules that a membership interest can satisfy the requirement for tax-free distribution that a distribution be made “with respect to its stock.”   

Corporate Transactions:

  • The IRS issued final regulations barring use of controlled corporations to avoid related corporation redemption rules.
  • The treatment of ordinary income from disposition of Section 306 stock as qualified dividend income is now “permanent”.   
  • The “collapsible corporation rules” are permanently repealed.

Exempt Organizations:

  • For 2014, unrelated business taxable income excludes annual dues of up to $158 per member received by agricultural or horticultural organizations.

Retirement Plans:

  • For 2014, the limit on 401(k) plan elective deferrals is $17,500.   
  • For 2014, compensation for “highly compensated employee” status is $115,000.
  • The limit on annual additions to a defined contribution plan for 2014 is $52,000.
  • The maximum annual benefit from a defined benefit plan is $210,000 for 2014.

Returns and Payment of Tax:

  • January 31 is the “starting date” for the 2014 tax filing season.
  • Individual tax return filing thresholds for 2014:
    • Single taxpayer: $$10,150.
    • Single taxpayer (age 65 or over): $11,700.
    • Married filing joint return: $20,300.
    • Married filing joint return (one 65 or over): $21,500.
    • Married filing joint return (both 65or over): $22,700.
    • Married filing separate return: $3,950.
    • Head of Household: $$13,050.
    • Head of Household (65 or over): $14,600.
    • Surviving spouse: $16,350 for 2014.
    • Surviving spouse (65 or over): $17,550.   

              

  • The IRS will recognize the “state of celebration rule” for joint return purposes, for same sex marriages irrespective of the state in which the couple is domiciled.
  • The income tax return filing threshold for a bankruptcy estate of an individual is $10,150 for 2014.
  • Mandatory employer and insurer reporting requirements under Code Sec. 6055 and Code Sec. 6056 and employer shared responsibility payments under Code Sec. 4980H, which were to have gone into effect on Jan. 1, 2014, are postponed until Jan. 1, 2015.
  • Applicable large employers and insurers don’t have to report information about an   employee’s insurance coverage for periods beginning after 2014.   

Estate, Gift & GST Taxes:

  • The basic exclusion amount for gifts and estates, and the exemption amount for the   generation-skipping transfer (GST) tax, is $5,340,000 for 2014 which equates to a “unified credit” of $2,081,800.
  • The maximum 2014 estate, gift and GST tax rates are 40%.
  • There is a new Schedule PC, Protective Claim for Refund, preserves estate’s right to a refund of estate taxes paid when a claim or expense that is the subject of unresolved controversy at the time of filing the return later becomes deductible.
  • A “marital deduction” is now allowed for property left to the decedent’s same-sex spouse in accordance with the Supreme Court’s “Windsor decision”.
  • The wording of Code Sec. 2010(c)(4) is amended by replacing “basic exclusion       amount” with “applicable exclusion amount”.
  • Regulations more fully address the portability election for decedents dying after 2010.
  • Forms 706 and 709 include a new section and schedule, respectively, for portability.
  • An executor must file an estate tax return if the decedent’s gross estate at death       exceeds the basic exclusion amount of $5,340,000 for estates of individuals dying in 2014.
  • The U.S. Court of Appeals, Ninth Circuit holds that an executor’s reliance on an accountant, which caused  a delay in filing the estate tax return, was not reasonable.   
  • Fixed-dollar gifts of limited liability company (LLC) interests are not void as against   public policy.
  • The Federal gift tax annual exclusion is $14,000 for 2014.
  • In 2014, $145,000 may be transferred to a noncitizen spouse free of gift tax.

As stated at the outset of this article, these are just some of the changes applicable to Federal tax laws in 2014. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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