Taxes: What's New for 2014?
January 8, 2014
- Last year's tax changes included a new Medicare surtax for high-income earners, a new top rate for dividends and long-term capital gains, and the phase-out of itemized deductions for high earners.
- If you're subject to higher taxes, it's even more important to take advantage of whatever tax breaks apply to you.
- Learn more about this year's inflation adjustments and common tax breaks, including retirement plan contributions and charitable giving.
Although there are no major tax law changes this year, there are still inflation adjustments and other routine changes to consider. As always, it's not what you make but what you keep that counts—that's why it's important to take advantage of every tax break you're entitled to. Here are a number of items to consider as you plan for the year ahead.
Take advantage of federal income tax changes
To keep pace with inflation, the IRS has widened the federal income tax brackets and increased certain exemptions, deductions and credits1 (see table below). For additional information, please visit the IRS website.
2013 Federal Income Tax Brackets
|Tax Rate on Ordinary Income||Single||Tax Rate on Qualified Dividends and Long Term Capital Gains|
|Married Filing Jointly /
Qualifying Widow or Widower
Payroll and Medicare taxes
Payroll taxes for Social Security benefits are collected under the authority of the Federal Insurance Contributions Act (FICA), which is why they're often referred to as the FICA tax. The wage base limit for Social Security (Old-Age, Survivors, and Disability Insurance, or OASDI) withholding of 6.2% was increased to $117,000. That means a maximum of $7,254 per employee will be withheld in 2014 ($117,000 × .062).
The wage base for Medicare withholding remains unlimited (employee tax rate of 1.45%), but health-care reform legislation in 2013 increased Medicare payroll withholding by 0.9% to 2.35% for amounts over $200,000 (single filers) or $250,000 (married filing jointly). Also, an additional 3.8% surtax applies to net investment income for taxpayers with AGI over $200,000 (single filers) or $250,000 (married filing jointly).
If you're married, filing jointly and pay excess Medicare taxes, you'll be eligible for a credit when you file your tax return—you can't just ask your employer to stop withholding the extra tax during the year. For example, let's say you're the only earner in a married couple. You make $225,000 in the course of the year, and your employer automatically withholds the additional 0.9% tax on your wages between $200,000 and $225,000. You'll be eligible for a credit when you file, because your total income falls below the $250,000 threshold for married joint filers.
Long-term capital gains and qualified dividends
A top rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $406,750 ($457,600 for married filing jointly). Long-term capital gains or qualified dividend income over that threshold are now taxed at a rate of 20%.
EXAMPLE: If a married couple already has $457,600 of taxable income and an additional $100,000 in long-term capital gains and qualified dividends, the entire $100,000 would be subject to the 20% rate. If, however, they only had $400,000 of other taxable income, then $57,600 of the additional amount would be taxed at 15% and $42,400 would be taxed at 20%.
Phase-out of itemized deductions and exemptions
The phase-out of certain itemized deductions and exemptions applies to single taxpayers with adjusted gross income (AGI) above $250,000 and married taxpayers filing jointly with AGI above $300,000. Many itemized deductions (such as mortgage interest expense, charitable contributions and state and local taxes) are reduced by 3% of the amount by which the AGI exceeds that $250,000/$300,000 threshold, with a maximum of 80% of itemized deductions. The personal exemption phase-out applies at a rate of 2% for each $2,500 increment over the threshold up to a maximum of 100% elimination of personal and dependent exemptions.
See if you're exempt from the Alternative Minimum Tax (AMT)
The AMT income exemption amounts increase in 2014 to $82,100 for married couples filing jointly and $52,800 for single filers.
Take advantage of lower tax rates for children
In 2014, children under 19 will pay no federal income tax on the first $1,000 of unearned income (such as capital gains or interest) and will be taxed at their own rate on the next $1,000. However, they will be taxed at their parents' tax rate on unearned income in excess of $2,000. (This will also be the case for full-time college students under age 24, unless their earned income is greater than one-half of their parents' support.)
Individuals age 19 and older (and dependent full-time college students age 24 and older) pay taxes at their own rate.
Boost your retirement savings and potentially enjoy tax benefits
2014 federal limits for retirement accounts
|Account||Contribution limit||Additional catch-up contribution for people age 50 and older|
|401(k), 403(b) and 457||$17,500||$5,500|
|QRP/Keogh and SEP-IRA||20% of net self-employment income
(or 25% of compensation) up to $52,000
|Individual 401(k)||20% of net self-employment income
(or 25% of compensation)
plus $17,500, up to $52,000
and Roth IRA
A few things to note about contribution limits:
- Traditional IRAs. Money you put in a traditional IRA is generally tax-deductible unless you're an active participant in a qualified workplace retirement plan, such as a 401(k) or 403(b). In that case, restrictions apply. If you're a single filer, your contribution is partially deductible if your modified adjusted gross income (MAGI) is between $60,000 and $70,000. If you're a married couple filing jointly, your 2013 contribution is partially deductible if your MAGI is $96,000 to $116,000. If you don't participate in a retirement plan at work (but your spouse does) and you file jointly, your contribution is partially deductible if your MAGI is $181,000 to $191,0002.
- Roth IRAs. If you're a single filer and your MAGI is $114,000 or less, your contribution limit is $5,500 (or $6,500 if you're 50 or older) in 2013. The contribution limit is gradually reduced for those with MAGIs of $114,000 to $129,000. If you're a married couple filing jointly and your MAGI is $181,000 or less, your contribution limit is $5,500 ($6,500 if you're 50 or older). That contribution limit is gradually reduced for those with MAGIs of $181,000 to $191,000.
Anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status. Converting all or part of a traditional IRA into a Roth IRA could be advantageous if you expect to be in the same or higher tax bracket when you eventually withdraw the money, have a reasonably long time horizon and can afford to pay the conversion tax from a source other than your IRA at the time of conversion.
Manage college expenses with these nifty tax benefits
Consider these tax-favored ways to pay for college costs:
- A Coverdell education savings account. If you're a single filer, you may make a maximum contribution of $2,000 per year per child, subject to income limitations. Be careful if accounts are established by different family members for the same child. Total contributions may not exceed $2,000 in any one year.
- A 529 college savings plan. Although there's no limit to how much you can contribute each year, each state's plan has its own lifetime limit—typically more than $200,000 per designated beneficiary3. You can also treat a 529 contribution as being made over five years for gift tax purposes. For example, a married couple could contribute up to $140,000 per child up front without using any of their lifetime gift tax credit (see below).
- Tax credits. The American Opportunity Credit is a modification of the Hope Credit and makes the credit available to a broader range of taxpayers. Through 2017, you may claim up to $2,500 on eligible college expenses paid from a non-529 account, subject to income limitations.
- Tax deductions. You may be able to deduct up to $2,500 of student loan interest, subject to income limitations.
Plan your gifts and estate to make the most of these tax breaks
- The gift tax annual exclusion amount remains at $14,000 for 2014. That means you generally can give up to $14,000 every year (or $28,000 for spouses splitting gifts) to any number of people, and these gifts will not be taxable. You can also give unlimited amounts toward tuition or medical expenses if you pay the provider directly. Beyond that, the lifetime gift and estate tax exemption will apply (see table below).
Estate and gift tax: 2014
|Estate Tax||Gift Tax|
|Highest rate||Exemption||Highest rate||Exemption|
|40%||$5.34 million*||40%||$5.34 million*|
*Adjusted annually for inflation
1. In some instances, modified adjusted gross income (MAGI) may be used to determine eligibility for certain deductions. MAGI calculations vary, so consult your tax professional.
2. Within certain AGI (or MAGI) phase-out ranges, you receive partial deductibility (or eligibility to contribute, in some cases) for certain tax breaks. At or below the low end of the range, you can receive full deductibility (or eligibility), but at or above the high end of the range, you lose deductibility (or eligibility).
3. As with any investment, it is possible to lose money by investing in a 529 plan. Before investing, carefully consider a plan's investment objectives, risks, charges and expenses. Additionally, if you are investing in a 529 plan outside the state in which you pay taxes, you should consider your own state's 529 plan to determine if you can obtain any tax or other benefits offered by your own state's plan.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.