Tax Preparation & Filing Strategy Tips for 2014
A Dozen Things You Need To Know About 2014 Taxes
Obamacare repercussions, expiring tax breaks, new tax legislation and the general hassles that come with a new tax year- what else do you need for a headache? What about avoiding the headache and allowing 2014 to be the year that you plan for tax liabilities, properly organize your financials and achieve an unprecedented understanding of your finances? Think of the possibilities (and not just having a solid New Year’s resolution)! When you take the necessary planning measures, you will save money, avoid the IRS and make your life easier.
Let’s just get some basics out of the way though because there is a lot of confusion surrounding certain dates, certain acts and certain government shutdowns which could all affect your tax filings and general status as an American taxpayer. Let’s just put a few of these facts out there:
Alterations to United States tax laws for 2014 are only effective in 2014 for taxes filed for the 2013 tax year. If a statute or tax law that you are questioning remained in place for the duration of 2013 and you are filing your 2013 taxes, you are still subject to that law; good or bad. Similarly, new 2014 tax laws are only effective since inception (unless in the rare case of a “grandfather clause”) and going forward (unless amended, expired or appealed).
It’s official, the partial government shutdown of 2013 has taken its toll on tax filing season in 2014. There is a catch though…the government has delayed tax filing season for those of us who want to file as soon as possible until the last week of January 2014 which is close to a week and a half later than the January 21, 2014 date that would have been customary. The IRS sites that it wants to make sure all systems are up and running and prepared to run seamlessly. One more catch though, we still have to file by April 15, 2014 because that is the law. So, taxpayers be aware that you have a week and a half less time to file your taxes in 2014.
The important thing to remember is that even in the most tranquil tax and political atmospheres, you are always going to have to worry about change. Make 2014 the year that you worry less and employ a qualified accountant to muscle through the details of filing taxes and preparing your financials. New York City and surrounding areas, let AberCPA of Rockland County, New York offer you our 12 tips and pitfalls guide to navigating 2014’s tax season.
#1 – In A Wealthy Tax Bracket? Watch Out For Added Taxes!
At AberCPA, we have identified four taxes and penalties for those who fall into higher tax brackets and income levels. Those four items are as follows:
The New 39.6% Tax Bracket
It’s been nearly 15 years since the United States has seen the unprecedented marginal tax rate of 39.6%. With certain Bush-era tax cuts having expired at the end of 2013, the 39.6% tax bracket brings the country back to tax rates that we have not witnessed since the 20th Century. Who will be subject to this new tax? Well those people who earn $400,000 as a single filer, $450,000 as a married couple filing jointly and $425,000 for heads of household. Take a look at this chart for a visual:
The New Medicare Surtax
Basically all earnings are subject to a Medicare tax- nothing has changed in that regard. What has changed is that certain filers, depending on income levels, will be subject to an additional 0.9% Medicare surtax. If your wages and compensation or self-employment earnings exceed $200,000 as an individual or $250,000 as a married couple filing jointly, watch out for this new tax. This chart breaks down the threshold for the new Medicare surtax:
The Net Investment Income Tax (NIIT)
So you think you may have skirted your way out of the 0.9% Medicare surtax? Well, think again because the most feared and notorious new tax is probably going to affect you. That tax is the Net Investment Income Tax (also known as the NIIT). Basically, the NIIT is also a Medicare surtax because the 3.8% additional tax that you will pay on the lesser of net investment income or modified adjusted gross income (MAGI) goes towards the funding of Medicare policies and practices that cannot be adequately funded by the individuals receiving those Medicare benefits. Taxpayers who make more than $250,000 as a married couple filing jointly or more than $200,000 as an individual will be affected by this tax if their net investment income or MAGI qualify. And net investment income has a broad definition so it’s best to work with an accountant or CPA who knows the ins and outs of this new legislation. Take a look at this chart which illustrates the impact to higher wage earners’ bank accounts based on the NIIT and our next topic, the phaseout of certain personal exemptions:
The Reduction Of Amounts For Personal Exemptions And Itemized Deductions
As if you couldn’t ask for more changes in tax legislation, the above chart gave you a sneak preview of the now legalized limitations for itemized deductions and other phaseout policies. In either case, if you are filing as an individual, you are subject to these new laws if your adjusted gross income (AGI) exceeds $250,000. Similarly, if you are filing jointly and your AGI surpasses $300,000, you will also be impacted by these changes in tax law.
Just so you can be familiar with the difference between Pease Limitations (also known as the limitations on itemized deductions) and the extra personal exemption phaseout (PEP), AberCPA will briefly explain each policy. The Pease Limitations received their namesake from former Representative Don Pease. The Pease Limitations will effectively reduce allowable itemized deductions, up to an 80% maximum reduction, if your AGI is higher than the amounts shown in the above chart on the bottom left ($300,000 for married couples filing jointly and $250,00 for single filers). The PEP’s will begin with roughly the same AGI thresholds and personal exemptions will be all but eliminated at higher incomes.
As you can see, there are lots of changes on the forefront that are best dealt with in conjunction with an accountant. Scott Aber, CPA of Rockland County, New York and New York City can guide you through the process and headaches of filing your taxes and developing a personalized financial strategy.
#2 – Claim The Home Office Deduction
Don’t be discouraged, there is some good news on the forefront for reducing taxes in 2014. If you are an entrepreneur and working out of a home office, you may be able to use a simplified IRS process for a home office deduction. With a maximum deduction of $1,500 on an annual basis, the new alternative for this deduction is calculated at $5 for each square foot of home office space with 300 square feet being the maximum allowable space ($5 x 300 = $1,500). So why is the option more simple? Millions of hours of paperwork are needed to fill out the customary Form 8829 that has been used for a home office deduction but now taxpayers can file for a home office deduction on their Schedule C by using a special Schedule C worksheet. The one thing to remember here is that all regulations surrounding the qualifications for a home office and subsequent deductions based on a home office still apply. In a nutshell, this means you must use whatever portion of your home (that you are claiming can be deducted) for regular and exclusive use for your employer (or you, if you are your employer), not just for your comfort.
#3 – Get Medical Insurance And Be Aware Of Medical Expenses
As it turns out, the Affordable Care Act (ACA) and Obamacare may not be so affordable for everyone. If you are currently uninsured, you have some serious things to consider if you want to avoid tax penalties. Obamacare registration is open through March 31, 2014 and you will face a penalty of the greater of 1% of your household’s annual income or $95 for each uninsured adult and $47.50 for each uninsured child or $285 for a family- whichever is higher- in 2014. The IRS will collect your fine (the terminology is still being determined as to whether or not your payment is a fine or penalty) in 2015 when you pay your 2014 taxes. If you get insurance for a portion of the year, you will pay a prorated amount. And, if you are getting a refund, the ACA penalty will be subtracted from that refund. If you don’t file for a refund, the IRS will send you a bill. If you ignore this invoice, the IRS will penalize your future refunds. Get on the ball with your insurance options if you have not done so already because the flat fee for an adult’s insurance will increase to $325 in 2015 and $695 in 2016. And this is what the IRS is calling the “shared responsibility payment”.
Some good news again though…as a taxpayer, you can still deduct your medical expenses provided none of the previous thresholds for income apply to you. The problem is that the threshold for actually deducting your medical costs (bills, premiums, prescriptions) now stands at 10% which is an increase from 7.5%.
#4 – Were You Energy Efficient?
There are a few ways you can save money if you made energy improvements to your home. Did you install a qualifying furnace or heat pump? Did you install new windows? Are you now on the solar power bandwagon? Any of these criteria can land you a refund or credit with the IRS and, sometimes, local taxing agencies. For improvements other than solar, the IRS states:
Only $200 can be for windows, $50 for any advanced main air circulating fan, $150 for any qualified natural gas, propane or oil furnace or hot water boiler and $300 for any item of energy-efficient building property.
As mentioned, a credit will normally be issued for solar but be aware that credits for plug-in electric vehicles can no longer be used as they are expired.
#5 – Know The Implications of Same-Sex Marriage Taxes
2014 will certainly witness more same-sex married couples who are filing taxes. In 2013, the Supreme Court of the United States reversed the 1996 Defense of Marriage Act (DOMA). This means that the United States will now recognize that the legal definition of marriage and who “qualifies” as married is up to the individual states. From a tax standpoint, same-sex couples are treated practically identical to other couples in that they can file jointly or separately even if they reside in a state that does not recognize same-sex marriage. The IRS will legally consider a couple to be married as long as they were married legally making a couple that got married in a state that recognizes gay marriage but reside in a state that does not recognize gay marriage still able to file jointly.
Although some same-sex married couples may find this new tax law to be a burden because they will be subject to higher taxes from the Medicare surtaxes or higher income tax brackets when their incomes are combined, there are positive things to report. For example, estate taxes are somewhat alleviated because a gay couple is legally considered married. Therefore, if one spouse passes away, the surviving spouse will not have to pay an estate tax on assets. Likewise, same-sex married couples can use the head of household status and have health insurance from an employer considered a pre-tax item and excluded from income. Some couples, depending on their financial condition, may want to take advantage of the option to file amended returns back to 2010 if it is beneficial to them. Of note is that local and state taxes will still be determined by those respective authorities so if a state does not recognize same-sex marriage then each person will have to file individually.
#6 – Know How To Report Your Education Expenses
Several education credits and possible deductions have been extended most notably the American Opportunity Credit. This credit allows for up to $2,500 per qualifying student for the purposes of tuition and other costs. Deductions for the interest associated with student loans and other tuition-related costs are also made available. Teachers remain eligible for book and other supply deductions for a maximum of $250 per annum. Not surprisingly, most of these education benefits are phased out as income increases.
#7 – Take A Look At Your Retirement Plan Options
With the tremendous amount of uncertainty surrounding the future of Medicare and Social Security, one needs to take a look at retirement plan options. Two things: if you don’t have a retirement plan, get one and, if you do have a retirement plan, enhance it. In the former situation, open an IRA or ROTH IRA with a reputable investment company, a bank or your employer. The people that work with those institutions or your employer’s benefits area will be able to give you guidance as to which type of plan is right for you and how much you should contribute. If your situation is the latter, see if you qualify to contribute more to your retirement plan and whether or not your employer will match your contributions.
Regardless of your situation though, your current tax liability will undoubtedly be reduced if you properly fund a retirement plan. You will also be providing for your future when there are fears that traditional government plans will not be able to do so. A tax professional is the best place to go if you have questions so give AberCPA a call at (845) 215-5969 or complete our contact form.
#8 – Follow Tax Legislation News
We have reviewed the impact of tax and general government legislation on your potential taxes but we want to stress the importance of “being in the know” about tax legislation developments so you can further avoid the pitfalls of tax surprises. Also, don’t think that following up on the latest tax news is an annual ordeal because it is practically a daily ordeal due to the rapid changes in tax legislation introductions or modifications. As an accountant, Scott M. Aber, CPA of the New York area has seen far too many instances where a client places too much faith in current tax laws that a sudden change in said tax law leaves a client at a loss in the thousands because Congress decided to modify a tax law.
#9 – Follow Tax Preparer Regulation News
“Being in the know” regarding tax preparer regulations naturally follows having adequate knowledge of tax legislation. AberCPA is a trusted tax advisor but, unfortunately, some accountants or tax preparers are not in the same elite and distinguished category as AberCPA. Capitol Hill and the United States court systems are all aware of the inadequacy of some tax preparers and it is a likelihood that you have seen television depictions of accountants or CPA’s who simply did not know what they were doing or were participating in illegal tax preparation activities for clients or themselves. Protect yourself and only use a trusted tax professional who can prove his or her qualifications such as compliance to accounting industry standards and competency exams, just to name a few examples.
#10 – File Taxes Early To Avoid Identity Theft And Refund Crime
If you are someone who has managed to avoid an identity theft incident, consider yourself quite lucky because you will soon be in a minority. Identity theft is a growing epidemic in our country and even the IRS has been hacked (more times than we can count) and had issues with the security and robustness of its online (and offline) systems as many people have rightfully been able to assign blame to the IRS for stolen Social Security numbers and other fraud incidents.
The reason why we suggest filing your tax returns early is because many fraudulent tax returns are filed as soon as the IRS opens the tax filing season and someone who steals your identity for purposes of receiving your tax return must use your social security number. If you file first, you have a better chance of getting your return on time. This is very sad but very true because we have seen clients wait up to three years to receive a legitimate tax refund because the online IRS system allowed a thief to process an electronic return in our client’s name. When the IRS receives the red flag (which they hopefully actually receive) that a social security number has been compromised and used for more than one tax filing in a tax season, a massive delay in the tax filing process will ensue and hopefully all damage is avoided.
On top of avoiding an identity theft case though, you will also get a refund sooner if you file early.
#11 – File Electronically
Although it may contradict the need for an accountant in New York, Connecticut or New Jersey in addition to your need for identity theft avoidance, AberCPA does suggest that you file your taxes electronically if you do not enlist the assistance of an accountant for filing. If you have a more simplified tax return and less backup supporting paperwork then using an online tax filing software program can work for you. The increase in the number of tax filers who chose the electronic route has been incredible and dramatic. The largest increase that we have seen thus far has been in the number of individuals who chose to use software programs that assisted in the self-preparation of income taxes for submission. If you find the right online package, that package may even be free. The only problem with these free packages and the ease of electronic filing is that your options can be limited if you have addendums or itemized deductions or credits. Also, if your income is more than $58,000 annually, you don’t qualify for many free options, especially those offered by the IRS.
#12 – Get Organized! Keep Records!
It’s an absolute must that you keep adequate records on a continual basis if you want your taxes completed right. Here are some of our suggestions for a successful tax season when it comes to recordkeeping:
Make a checklist and calendar with all the items you will need for your tax filing. This should include official documents, non-official documents and documents you need to create so you can understand all the documents you have. Think about W-2s, 1099s, K-1s and other statements. Also keep in mind that you will want to maintain your charitable donations documentation or other donations made to qualified nonprofit organizations or receipts for items like job searching expenses.
Setup and configure your tax file. Choose your prefered method…do you like file systems that are physical or electronic? The luxury of an electronic file is that you can email it easily and it is more readily accessible than a physical bin. It’s a virtual type of tax accounting system.
Get an accountant and schedule periodic planning sessions with that accountant so you can make sure you are on track for a seamless tax year.
There is a litany of items you will need for a complete file but a qualified accountant will help you with the gathering of items for your complete tax file.
The biggest takeaway that AberCPA wants you to get from our tax highlight guide for 2014 is the importance of filing your taxes properly and maintaining the funds in your bank account. The IRS recorded processing close to 147 million tax returns for the 2012 tax year and more than 109 million taxpayers received refunds. Make sure you are one of those people who get a refund while making 2014 the year that you understand your taxes and liabilities so you can organize for your future. Call Scott M. Aber, CPA of New York at (845) 215-5969 or complete our contact form. We look forward to hearing from you!
About Scott Aber
My name is Scott M. Aber, CPA and I established a full services New York accounting firm in 1998. The purpose and goal of my firm now is the same as it was nearly 25 years ago. That goal is to provide proactive and compliant tax and financial services to my clients. Since the inception of Scott M. Aber, CPA, I have grown to support over 600 individuals clients and over 150 businesses. My clientele are local and small businesses, restaurants, individuals and medium to large size companies.
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