2014 will
be a challenging tax year for businesses and higher-income taxpayers. The
following issues are concerns that may impact you and your company’s tax
liability in the new year.
- Small Business Health Insurance
Credit – The tax credit to small employers (25 or
fewer equivalent full-time employees) that provide an affordable health
insurance plan for their employees and supplement at least half the
premiums, will increase to 50% of the employer’s contribution in 2014, up
from 35% in 2013. For non-profit employers, the credit will be 35% in
2014.
- Net Investment Income Tax – As part of the Patient Protection & Affordable Care Act
(the new health care legislation sometimes referred to as “Obamacare”), a
new tax kicked in for 2013 and will continue in 2014 and beyond. It is a
surtax levied on the net investment income of taxpayers in the higher-income
brackets. And although it is perceived as an additional tax on
higher-income taxpayers, it can affect even those who normally don’t have
higher income if they have a large income from the sale of real estate,
certain business assets, stocks, or other investments. This is on top of
the 20% long-term capital gain tax
rate now in effect for higher-income taxpayers.
- Higher Tax Rates – Prior to the increase in 2013, there were six tax brackets:
10, 15, 25, 28, 33, and 35%. Beginning
in 2013 and continuing for future years, a new top rate of 39.6% has been added for higher-income
taxpayers.
- Higher Capital Gains Rates –
Beginning in 2013 and continuing for future years, the tax rate for
long-term capital gains and qualified dividends has been increased to 20% (up from 15%) for taxpayers with incomes exceeding the
threshold for their filing status.
- Medical AGI Phase-out –
Beginning in 2013 and continuing for future years, a taxpayer’s medical
deductions will be reduced by 10% of their adjusted gross income, up from
the previous 7.5% (but the 7.5% continues to apply to seniors through
2016).
- Possibility of Lower Expensing
Deductions – The Sec 179 business expensing allowance for
business equipment drops from $500,000 per year to $25,000 in 2014 unless
Congress extends the more liberal amount.(1)
- Bonus Depreciation Expires – Beginning
in 2014, the 50% bonus depreciation for tangible business assets will
expire unless Congress extends it.(1) This also reduces the
first-year maximum depreciation deduction for business autos and small
trucks.
- Individual Insurance Mandate – Beginning in 2014, the Patient Protection & Affordable
Care Act will impose the new requirement that U.S. persons, with certain
exceptions, have minimum essential health care insurance, or face a
penalty.
- Large Employer Mandatory
Insurance Requirement – Originally scheduled
to begin in 2014 but delayed until 2015 because the government did not
have the reporting mechanisms in place, large employers, generally those with 50 or
more full-time equivalent employees in the prior calendar year, that:
o
Do not offer health coverage for all its full-time
employees,
o
Offer minimum essential coverage that is
unaffordable (employee contribution being more than 9.5% of the employee’s
household income), or
o
Offer minimum essential coverage where the
plan’s share of the total allowed cost of benefits is less than 60% (i.e., less
than the bronze plan coverage),
will be required to pay a penalty if
any of its full-time employees were certified to the employer as having
purchased health insurance through a state or federal exchange and qualified
for either tax credits or a cost-sharing subsidy.
- Simplified Home Office
Deduction – Effective
for tax years beginning in 2013 and continuing for 2014 and beyond,
taxpayers can elect a simplified deduction for the business use of the
taxpayer’s home. The deduction is $5 per square foot with a maximum square
footage of 300. Thus, the maximum deduction is $1,500 per year.
Eligibility qualifications are the same whether the simplified or regular
deduction is claimed.
- Increased Payroll and
Self-Employment Tax – As part of the new health care legislation, higher-income
taxpayers are faced with an additional 0.9% health insurance (HI) tax.
Starting in 2013, and continuing for future years, this surtax is imposed
upon wage earners and self-employed taxpayers whose wage and
self-employment income exceeds $250,000 for married taxpayers filing
jointly ($125,000 if filing separately) and $200,000 for all others.
- Pease Limitations –
The Pease limitation on itemized deductions that was reinstated in 2013
will continue for 2014. The Pease limitation phases out certain itemized
deductions for higher-income taxpayers.
- Phase-out of Exemptions -
The phase-out of exemptions for higher-income taxpayers that was
reinstated in 2013 continues for 2014.
- Longer Depreciation Life for
Leasehold and Restaurant Property – The current 15-year
depreciable life will increase to 39 years in 2014.(1)
- Qualified Small Business Stock
Gain Exclusion – Beginning for qualified small business stock
issued in 2014, the gain exclusion drops from 100% to 50%.
- Qualified Real Property
Expensing – Congress temporarily permitted the use of the
Sec 179 expensing deduction to write off certain leasehold improvements,
and restaurant and retail property improvements. Without Congressional
intervention, this provision will no longer be available in 2014.
(1)
Congress,
a few years back, engaged in brinkmanship with last-minute tax changes.
Normally, they have managed to finalize tax law by year’s end. However, for
2013, they adjourned without addressing the issue of extending many tax breaks
that were set to expire at the end of 2013. It is not known if these tax
provisions will be extended or not.
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