Taxpayers can ring in 2014 knowing that they don't have to wait on Congress to finalize tax laws affecting their 2013 returns. The American Taxpayer Relief Act of 2012 that was finally enacted on Jan. 2, 2013, made many tax laws permanent and extended other provisions through 2013. But the tax-related celebrations are likely to be short-lived. Here are 10 tax traps you need to watch out for in 2014.
1. Get ready to wait early in the year.
The federal government shut down for 16 days last October, but taxpayers are still paying for it. The IRS says Jan. 31, 2014, is the earliest it will be ready to process individual tax returns. That date might even be pushed back to Feb. 4 in order for the agency to complete system updates and tests, which were interrupted by the shutdown. The IRS promises to make an official announcement of the filing season start date as soon as it knows for sure. You can go ahead and submit your return electronically as soon as you're ready; your e-filer will hold it until the IRS is ready to accept returns. If, however, you file a paper return, the IRS encourages you to wait until Jan. 28 (or later) to mail it.
2. Get ready to wait later in the year.
Every year or so, some temporary tax provisions are renewed by Congress. In recent years, however, lawmakers have let the laws expire and then renewed them retroactively, most recently in the American Taxpayer Relief Act of 2012, also known as the "fiscal cliff" tax bill. Expect a replay in 2014. Fifty-five tax provisions expire on Dec. 31, 2013. This doesn't affect your 2013 tax return, but tax planning for 2014 will be a different story. Consideration of extenders has been complicated by possible overall tax reform and budget considerations. Uncle Sam could bring in billions by letting some or all of the extenders fade away. That would mean, however, that individual taxpayers would lose such popular tax breaks as the itemized deduction for state and local sales taxes, the above-the-line deductions for tuition and fees and educators' out-of-pocket classroom expenses. The consensus is that Congress will take up the extenders in 2014, but whether that will be before or after the Nov. 5 midterm election is unclear. The longer lawmakers wait, the harder it will be to plan and implement your 2014 tax strategy.
3. Watch for added taxes if you're wealthy.
The American Taxpayer Relief Act of 2012 was not kind to wealthier taxpayers, and they will find out the extent of the damage when they file their 2013 returns.
In addition to paying a top ordinary tax rate of 39.6 percent if, as a single filer, your taxable income is more than $400,000 ($450,000 for married couples filing jointly), you could face added taxes. The most dreaded is the new net investment income tax of 3.8 percent, also known as the Medicare surtax because the money goes toward that health coverage program for older Americans. The tax applies to either your modified adjusted gross income or net investment income, whichever is lower, if you earn more than $200,000 as a single taxpayer or $250,000 as a married joint return filer. The net investment income tax will not only take a bite out of taxpayers' bank accounts, but also cause headaches for high-income earners and their tax professionals working through the tax regulations. Topping it off, single taxpayers who make more than $250,000 and jointly filing couples making more than $300,000 will see their personal exemptions and itemized deduction total reduced.
4. Sign up for medical insurance.
The Affordable Care Act will continue to roll out in 2014, meaning that uninsured individuals have some choices to make that could have tax implications. Enrollment for health insurance under Obamacare, as the health reform act is popularly known, goes through March 31, 2014. If you don't buy an insurance plan, you could face a penalty. The charge for 2014 is either 1 percent of your yearly household income or $95 per uninsured adult and $47.50 per child, up to $285 for a family. You pay whichever amount is higher. If you get insurance for part of the year, your penalty will be prorated. You'll pay the penalty when you file your 2014 tax return in 2015. If you're getting a refund, the IRS will subtract your ACA penalty from the amount you were to get back. If your refund isn't large enough to cover the penalty, the IRS will send you a bill. Ignore that and the tax agency will take the amount out of future tax refunds.
5. File jointly if you're a same-sex married couple.
Married same-sex couples now have the same federal tax filing responsibilities as heterosexual couples. Following the Supreme Court invalidation of the Defense of Marriage Act, the IRS instructed same-sex married couples to file jointly or as a married couple filing separately even if the state where they live does not recognize their marriage. This will simplify same-sex couples' federal filings, but if they must pay state income taxes, depending on their state's law, they could still face filing two state returns as single taxpayers.
6. Claim the simplified home office deduction.
The recession has prompted many workers to start their own businesses, many of which are run from their homes. There's good filing news for these entrepreneurs. For 2013 returns filed in 2014, the IRS is now offering a simplified home office deduction. The new optional deduction is $5 for each square foot of home office space, up to a maximum of 300 square feet. That comes to a maximum $1,500 annual home office deduction. The IRS estimates that this option will save home-office filers who claim it's an estimated 1.6 million hours of paperwork and record keepings collectively. Instead of filling out Form 8829, you'll use a worksheet in the Schedule C instruction book and enter your simplified home-office deduction amount on Schedule C. While the new deduction option will be welcomed by many, note that the requirements to qualify as a home office still apply. For instance, the office space must be used regularly and exclusively for business.
7. Keep an eye on IRS troubles.
The IRS is proposing new regulations for groups seeking 501(c)(4) nonprofit status. This designation was the focus of a Treasury Inspector General for Tax Administration investigation of IRS handling of Tea Party-affiliated organizations seeking the preferable tax status. The IRS is proposing limits on these so-called social welfare groups' spending on political campaign-related activities. Expect continued debate on the groups' activities and IRS oversight before any final regulations are issued. Also look for Congress to restart hearings into IRS activity in the tax-exempt organization area as the 2014 election campaigns heat up. And stay tuned for any changes John Koskinen, a retired corporate restructuring expert whom President Barack Obama has nominated to take over as IRS commissioner, might make when he's finally approved by the Senate for the job.
8. Pay attention to tax preparer regulation.
The IRS effort to regulate professional tax preparers will continue in 2014, both in the court system and on Capitol Hill. The agency wants to register all tax preparers who aren't already subject to certain standards (that is, attorneys, Enrolled Agents or CPAs) and require they pass competency exams and take continuing education classes. The IRS believes this will help reduce incorrectly and fraudulently filed returns. Three tax pros filed a federal lawsuit against the IRS, winning the first court round. An appellate court decision is pending. Meanwhile, legislation has been filed in the House to give the IRS statutory authority to regulate tax preparers. Senate Finance Committee Chairman Max Baucus also has suggested such preparer oversight in his tax reform working drafts. A final decision on tax preparer standards could come in 2014, affecting taxpayers who seek professional help in fulfilling their tax responsibilities.
9. Watch out for tax reform.
The last overhaul of the federal tax code was in 1986. Will we finally see major changes in the Internal Revenue Code in 2014? Probably not. Will we hear a lot of talk about tax reform? Yes. It is an election year and talk of taxes makes for good campaign ads. Rep. Dave Camp, R-Mich., and Sen. Max Baucus, D-Mont., are insistent that there will be some tax reform before they leave the chairmanships of, respectively, the House Ways and Means and Senate Finance committees. Both have led a cross-country tour to solicit public input on tax reform, as well as set up a website on the topic. Camp has focused on 11 specific tax reform working groups. Baucus also has coordinated tax reform option papers and recently released some of his ideas in discussion drafts.
10. Take advantage of inflation tax adjustments.
One thing we do know for sure for 2014, inflation had a nominal effect on around 40 tax provisions. Most notable is that income brackets were widened a tad, meaning you can earn a bit more next year without being bumped into a higher tax bracket. Most people claim the standard deduction, and those amounts for each filing status in 2014 were increased slightly, as was the personal exemption amount, going from $3,900 to $3,950. However, the amounts you can contribute to your workplace pension plan and individual retirement account in 2014 have stayed the same as in 2013.