Recently the IRS released most cost-of-living adjustments for 2014. These are automatic adjustments built into the tax law, but they don’t always result in increases.
With inflation remaining relatively low, there are many amounts that will stay the same as they were for 2013, and those that do change increase only modestly. Nevertheless, as you consider 2013 year end tax planning strategies, it’s helpful to know what these amounts will be for 2014 so you can take them into account in your planning.
Individual income taxes
Tax brackets will widen and personal exemptions will increase for 2014, but by smaller margins than they rose for 2013.
Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $150 to $300, depending on filing status, but the top of the 35% bracket increases by $3,800 to $7,600, again depending on filing status.
2014 ordinary income tax brackets
|Tax rate||Single||Head of household||Married filing jointly or surviving spouse||Married filing separately|
|10%||$0 – $9,075||$0 – $12,950||$0 – $18,150||$0 – $9,075|
|15%||$9,076 – $36,900||$12,951 – $49,400||$18,151 – $73,800||$9,076 – $36,900|
|25%||$36,901 – $89,350||$49,401 – $127,550||$73,801 – $148,850||$36,901 – $74,425|
|28%||$89,351 – $186,350||$127,551 – $206,600||$148,851 – $226,850||$74,426 – $113,425|
|33%||$186,351 – $405,100||$206,601 – $405,100||$226,851 – $405,100||$113,426 – $202,550|
|35%||$405,101 – $406,750||$405,101 – $432,200||$405,101 – $457,600||$202,551 – $228,800|
|39.6%||Over $406,750||Over $432,200||Over $457,600||Over $22|
The personal and dependency exemption increases by only $50, to $3,950 for 2014.
Beginning last year, the exemption returned to being subject to a phaseout. The phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (2% of each $1,250 for separate filers).
For 2013, the phaseout starting points increase by $2,525 to $5,050, to AGI of $254,200 (singles), $279,650 (heads of households), $305,050 (joint filers), and $152,525 (separate filers). The exemption phases out completely at $376,700 (singles), $402,150 (heads of households), $427,550 (joint filers), and $213,775 (separate filers).
Last year the reduction on many itemized deductions also returned. It reduces otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). For 2014, the thresholds are $305,050 (up from $300,000) for joint filers, $279,650 (up from $275,000) for heads of households, $254,200 (up from $250,000) for singles and $152,525 (up from $150,000) for separate filers.
The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.
Under the 2012 taxpayer relief act, the brackets, exemptions and exemption phaseouts for the AMT are now annually indexed for inflation. The exemption amounts for 2014 are $52,800 for singles and heads of households and $82,100 for joint filers, increasing by $900 and $1,300, respectively, over the 2013 amounts. The inflation-adjusted phaseout ranges for 2014 are $117,300–$328,500 (singles and heads of households) and $156,500–$484,900 (joint filers). (Amounts for separate filers are half of those for joint filers.)
Education- and child-related breaks
The maximum benefits of various education- and child-related breaks generally remain the same for 2014. But most of these breaks are also limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.
The MAGI phaseout ranges generally remain the same or increase modestly for 2014, depending on the break. For example:
The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2014: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.
The Lifetime Learning credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2014; they’re $108,000–$128,000 for joint filers and $54,000–$64,000 for other filers — up $1,000 for joint filers and others.
The adoption credit. The MAGI phaseout ranges for this credit also increase for 2014 — by $3,300, to $197,880–$237,880 for joint, head-of-household and single filers. The maximum credit increases by $220, to $13,190 for 2014.
(Note: Married couples filing separately generally aren’t eligible for these credits.)
These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.
Most retirement-plan-related limits won’t go up in 2014, but a few will, potentially providing slightly enhanced opportunities to build retirement savings:
|Type of limitation||2013 limit||2014 limit|
|Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||$17,500||$17,500|
|Annual benefit for defined benefit plans||$205,000||$210,000|
|Contributions to defined contribution plans||$51,000||$52,000|
|Contributions to SIMPLEs||$12,000||$12,000|
|Contributions to IRAs||$5,500||$5,500|
|Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457 (c)(1)||$5,500||$5,500|
|Catch-up contributions to SIMPLEs||$2,500||$2,500|
|Catch-up contributions to IRAs||$1,000||$1,000|
|Compensation for benefit purposes for qualified plans and SEPs||$255,000||$260,000|
|Minimum compensation for SEP coverage||$550||$550|
|Highly compensated employee threshold||$115,000||$115,000|
Your modified adjusted gross income (MAGI) may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2014:
Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:
• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
o For a spouse who participates, the 2014 phaseout range limits increase by $1,000, to $96,000–$116,000.
o For a spouse who doesn’t participate, the 2014 phaseout range limits increase by $3,000, to $181,000–$191,000.
• For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2014 phaseout range limits increase by $1,000, to $60,000–$70,000.
Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.
Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:
• For married taxpayers filing jointly, the 2014 phaseout range limits increase by $3,000, to $181,000–$191,000.
• For single and head-of-household taxpayers, the 2014 phaseout range limits increase by $2,000, to $114,000–$129,000.
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
(Note: Married taxpayers filing separately may be subject to much lower phaseout ranges for both traditional and Roth IRAs.)
Gift and estate taxes
The 2012 taxpayer relief act set a maximum rate of 40% for gift, estate and generation-skipping transfer (GST) taxes. It also retained a $5 million unified gift and estate tax exemption and a $5 million GST tax exemption. Both exemptions are adjusted annually for inflation; for 2014 the amount is $5.34 million (up from $5.25 million for 2013). The annual gift tax exclusion remains at $14,000 for 2014.
Be on the lookout for additional changes
The IRS has now released most of the 2014 cost-of-living adjustments. But some key adjustments affecting higher-income taxpayers have yet to be released: the thresholds for the expanded Medicare taxes that went into effect in 2013 under the Affordable Care Act. The additional 0.9% tax on FICA and self-employment income and the new 3.8% tax on net investment income can affect not just taxpayers in the top regular income tax bracket of 39.6%, but also those in the 33% and 35% brackets. So you’ll want to be on the lookout for these numbers when they come out so you can take them into account in your tax planning.
To learn more about how to take advantage of the tax-savings opportunities available to you, please contact us. We’d be pleased to help you identify the best strategies for your specific situation.