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According to Werner…

Our contribution to the latest thinking and advice on various current accounting and financial topics.

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Standard Tax Changes for 2014

January 8 2014

Tax changes occur from year to year in order to accommodate new tax guidelines for the year as well as inflation. The good news is that the IRS does provide some details about the changes in the form of helpful bulletins and useful articles. These are a few of the highlights you need to know about for the changes to expect for the 2014 tax year.

Inflationary Adjustments

Most people hear the word inflation and instantly begin clenching their teeth. No one wants to see prices or interest rates rise. However, when it comes to taxes, the tax code adjusts in order to account for inflation, which can result in modest savings for the average taxpayer. In 2014, for example, a married couple filing jointly whose total taxable income is $100,000 will pay $145 less in taxes for 2014 than they did in 2013.

Deductions

Standard deductions for singles and married people who file individually increase in 2014 from $6,100 to $6,200. The standard deduction for married couples filing jointly increases to $12,400. Head of household deductions also increase from $8,950 to $9,100.

One deduction that’s a little different is the standard deduction for those who are blind and the age of 65 or older. The deduction will remain the same ($1,200) for those who are married individuals and for surviving spouse, but will increase to $1,550 for those who are single, blind, and aged 65 or older.

Gifting Adjustments

While the annual “Gift Tax” threshold remains the same in 2014 at $14,000 per person, per year for individuals, the lifetime amount increases in 2014 from $5,250,000 to $5,340,000. These gifts impact your estate once you’ve died, so plan your gifting carefully.

Tax Credits

The year 2014 marks many changes in the area of tax credits. The Earned Income Tax Credit, for instance, the maximum credit amount for earned income of married couples filing jointly with three or more children is $6,143 for 2014. The Hope Scholarship, American Opportunity, and Lifetime Learning Credits are increased to a maximum of $2,500 for 2014 with certain conditions. The Adoption Credit, also seeing changes for 2014, is $13,190 for children with special needs though that credit is reduced for people above certain income levels.

Remaining Unchanged

Sometimes, though, the big news is what stays the same rather than the things that have changed. Despite all the increases there are several programs that are remaining static between 2013 and 2014. Notable examples include Flexible Spending Accounts, the $5,500 limit on IRA Contributions, and the Child Care Tax Credit.

Planning ahead can help you prepare for 2014 tax changes and adjustments now rather than being taken by surprise when they arrive. Now is the time to begin planning your tax strategy for 2014 and beyond.

Striking Out on Your Own in 2014? Your New Tax Obligations

December 20 2013

Many newly self-employed individuals get quite a shock when they start planning for income taxes. Here’s what you need to know.

You probably remember your surprise when you got your first paycheck from your first job in high school or college. Who is this FICA, you may have thought, and where is all of my money going?

Taxes and other payroll deductions are just a part of your financial life now, and you understand where it all goes.

If you’re planning to be self-employed sometime in 2014, though, you have another IRS education coming your way. Here’s what you can expect.

An Annual Tax Return

You’re still required to file one of these every year, though you’ll have to get acquainted with some new forms and schedules, particularly the Schedule C. This is where you’ll account for your income and expenses and declare a profit or loss.

You may be able to complete a Schedule C-EZ instead of a Schedule C. This is a less complex form that you can submit if you:

  • Have expenses of $5,000 or less
  • Don’t have employees
  • Run a business that doesn’t have inventory, and
  • You’re not depreciating any property or deducting the cost of your home.

Estimated Taxes

As an employee of a company, you’ve already been paying estimated taxes, those deductions for Medicare, Social Security, federal and state income tax that come out of your check every payday. You’ve just been paying it a little at a time, so it doesn’t seem that overwhelming.

Your first estimated tax payment might. That’s a good thing – it means you’re already generating enough income to warrant a sizeable tax bill. But it also means that you have to come up with a chunk of money four times a year to pay your estimated taxes. You’re basically just keeping up with your counterparts in the full-time workforce.

The trick lies in figuring out how much of your income will be owed in taxes every three months. There’s no hard-and-fast rule – that’s why they’re called estimated taxes. We can help you devise a formula that will work for you.

The IRS offers a form that contains instructions for paying estimated taxes, worksheets, current rates schedules and vouchers for submitting your payments: the 1040-ES.

Self-employment Taxes

Often referred to as SE tax, this financial obligation meets your requirements for submitting Medicare and Social Security payments. When you were employed by a company, your employer contributed a portion of it. Now you must pay all of it.

Your Business Structure

A decision that will have tremendous bearing on your taxes is the type of business structure you choose. If you’re just going off on your own, this will most likely be a sole proprietorship. More complex business structures include partnerships, corporations and Limited Liability Companies (LLC).

If you’re at all uncertain about which is the best fit for your new venture, by all means contact us. We’ll help you sort it out and work with you on your new requirements for tax planning, preparation and filing.

The Affordable Care Act

December 15 2013

Several sections of the Affordable Care Act have been implemented; however, there are a number of changes that won’t go into effect until 2014. What does this mean for taxpayers? The short and sweet answer is that most every American will be required to have health insurance, and many businesses will be required to offer insurance to their employees. The government’s basis for this Act is simply finding a way to get healthy people who don’t feel the need to pay for expensive coverage to purchase health insurance and help fund the cost of people who require more medical care.

Who Isn’t Required to Have Coverage

If you currently do not have coverage and any of the below situations apply to you, you may not be required to purchase coverage.
– You have been uninsured for less than three months.
– You have religious objections.
– You are in prison.
– You face financial hardships.
– You are an undocumented immigrant.
– You are an American Indian.

What if I’m Required to Have Coverage but Choose Not To?

If you are not in one the above situations and choose to not purchase insurance, you could be subject to a penalty. In 2014, you will pay the greater of 1% of your taxable income or $95. In 2015, the fine will be $325 or 2% of your taxable income. In 2016, the penalty will be $695 or 2.5% of your taxable income. Each year after the government will refigure the penalty based on cost of living adjustments, but you can be sure it will increase.

How Much Will This Cost and Who Will Help Me Pay for It?

Like most tax situations, that depends on your income levels. If your income ranges between 133 and 400 percent of the Federal Poverty Level, you could end up receiving premium credits that will help reduce your monthly premium payment. For example, if your income is 400% of the Federal Poverty Level, your premium costs will not be more than
9.5 of your household income.

There are host of unknowns and uncertainties when it comes down to the ACA, and we can help you sort through some of the confusion. Please give us a call so we can discuss your situation and what impact the ACA could have on you.

Avoiding Capital Gains When You Sell Your Home

December 10 2013

The average family selling a home for the first time and moving on to another home or newer town will not need to worry about capital gains. According to the IRS, when you sell your primary residence (the key word here is primary residence or the home you actually live in), you can realize up to $250,000 in profit without owing capital gains taxes. That number is doubled for married homeowners to $500,000.

The Primary Residence Requirement

In order to qualify for the exemption from capital gains taxes on the sale of your home, it must be your primary residence. However, the IRS offers a great deal of latitude in defining a primary residence as a home you own and live in for two of the previous five years before selling the home.

While it is possible to sell multiple homes without acquiring a capital gains tax penalty, you must wait two years between these transactions. This makes sense as the intent is for this home to be your primary residence and the IRS requires two of the past five years of residence in order for the home to qualify.

Exceptions to the Two-Year Rule

For every rule, there is usually an exception. The same holds true when it comes to the two-year rule for capital gains exemptions. If you have lived in your home less than two years, you may still exclude a portion of the gain if you are forced to move due to a change in jobs, the result of health-related issues, or other unexpected issues. These unexpected issues include the destruction of your home, divorce, death, loss of a job, and acts of terrorism or war.

Another exception occurs when one of the primary residents of the home becomes suddenly disabled (mentally or physically) and can no longer care for him/herself as a result of the disability. As long as the individual lived in the home for one year before being moved into a licensed care facility, the time the individual lived in the primary care facility may count towards the two-year rule.

Upping the Ante for Bigger Tax Benefits

Another way to avoid capital gains taxes on higher ticket home sales is to add more owners. As long as the owners meet the residence requirements, they can each shelter an additional $250,000. This means if you add an adult child as a homeowner who has lived in the home for two of the past five years along with you and your spouse, the three of you can shelter a total of $750,000 profit from capital gains taxation.

No one wants to pay unnecessary taxes. The government has granted homeowners a major boon when it comes to eliminating capital gains taxes on home sales. Keep in mind though, that these are generalized rules, and may not apply to every situation.

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