Here are some of the changes that are currently in place for Tax Year (TY) 2014 returns to be prepared in 2015. Keep in mind that it is possible that legislation will be passed sometime in 2014 which could change the below.
This is the first year of reporting about taxpayer’s health insurance on the federal tax return, so if anyone did not have insurance for each month of the year, there will be a penalty assessed (effectively a tax) and payable with the tax return. This also applies for all dependents who live in the household. If insurance was purchased through an Exchange, a form will be sent from the Exchange showing the amount and the amount of any subsidy; a reconciliation has to be done to determine whether any subsidy needs to be paid back because of higher income than expected.
For homeowners with Cancellation of Debt Income on their personal residences, there will continue to be an automatic exclusion for federal purposes.
There will continue to be an option to deduct sales tax on Schedule A instead of state income tax.
Mortgage insurance premium will continue to be deductible as mortgage interest on Schedule A.
Tuition Deduction will continue to be an option for higher education expenses, as well as American Opportunity Tax credit up to $2,500. Credit is phased out at AGI over $80,000 single and $160,000 married.
$250 Educator Expenses will continue to be allowed as an adjustment on the 1040 for federal purposes.
IRA transfers to charity in lieu of RMD's (Required Minimum Distribution) will continue to be allowed.
Residential Energy Credit will continue to be allowed.
For business purchases, Section 179 depreciation will remain at $500,000.
50% bonus depreciation for qualified business purchases will continue to be allowed.
The 2014 Personal Exemption is $3,950. The exemption starts to phase out at AGI of $254,200 for single taxpayers, $279,650 for Head of Household taxpayers, and $305,050 for Married Filing Joint taxpayers. The exemptions are fully phased out at $376,700, $402,150, and $427,550, respectively.
The 2014 Standard Deduction for Single taxpayers is $6,200, for Married Filing Joint taxpayers is $12,400, and for Head of Household taxpayers is $9,100.
In order to claim a child as a dependent, they must be under 19 or must be a full time student until the age of 24, they must live in the same household (or be away at college), must not provide over ½ their own support (which does include student loans), must be younger than taxpayer, and must not have filed a joint tax return of their own.
Divorced parents can claim a child as their dependent if the child spent the highest number of nights with that parent during the tax year; if that number is equal for both parents, the parent with the highest adjusted gross income may claim the dependent child. These rules supercede the divorce decree regarding claiming the dependent.
California law does not conform to the “time” test and goes by the divorce decree to determine which parent can claim the child as a dependent. This creates a difference in dependents between the federal tax return and the California tax return.
Long term capital gains and qualified dividend tax rates will remain at 20% for those at the highest income tax rate of 39.6%, so it’s best to hold stock longer than a year so the gain will qualify for long term tax treatment. Short term gains will be taxed at the ordinary income tax rate, which may be as high as 39.6%.
The IRS has determined that Bitcoin is not currency, but is an asset which is taxable as capital gain or loss. California, on the other hand, considers Bitcoin currency and expects to collect Sales Tax on transactions in which Bitcoin was used.
The IRS has determined that repayments for disability to private insurance companies is taxable and do not offset social security disability payments, which are not taxable.
The Foreign Income Exclusion for 2014 is $99,200. California does not have a foreign earned income exclusion; nonresidents are taxed on income from sources within California, residents of California are taxed on all income from world-wide sources.
U.S. citizens, residents and domestic entities, are required to file FinCEN Form 114 (used to be called FBAR) by June 30 if they have a financial interest in, or signature authority over one or more accounts in a foreign country and the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
Form 8938 must also be filed by taxpayers with foreign financial accounts if the aggregate balance is over $50,000 at the end of the year or $75,000 at any time during the year (single taxpayer); thresholds are double for Married Filing Joint taxpayers.
Foster care payments made to family members are now considered non-taxable.
Compensation of Injury or Sickness and Punitive Damages is taxable; awards for personal injury are not taxable.
Gift Tax Returns are required from the Donor if the 2014 gift amount exceeds $14,000, or $28,000 in the case of a married couple; these are information returns only and no tax liability is assessed.
Itemized Deductions limited for relatively high income taxpayers; for single taxpayers they begin to phase out when AGI reaches $254,200, for Married filing joint taxpayers when AGI reaches $305,050.
For business miles, the IRS accepted mileage rate for 2014 is $.56; $.235 for medical and moving; $.14 per mile for charitable miles.
Medical expenses are limited to 10% of Adjusted Gross Income (AGI) unless the taxpayer or taxpayer’s spouse is 65 or older by the end of the tax year. For California the medical expenses are still only limited to 7.5% of AGI.
Home mortgage interest can be claimed on Schedule A Itemized Deductions, but only on mortgage debt of $1 Million or less; home equity loans are limited to $100,000 for buying, building or improving the home.
Taxpayers can claim home mortgage interest on their main residence and one second home.
Mortgage interest paid can only be deducted if there is a written loan agreement and a deed of trust, properly recorded within the state tax jurisdiction.
Mortgage interest can only be deducted if the debt is an obligation of the taxpayer and not an obligation of someone else.
Filing a federal return required for single taxpayers if total income is at least $10,150, and for married filing joint $20,300. Exceptions include self employment earnings at least $400 as well as unearned income (investment) over $1,000.
California filing required for single taxpayers with over $16,047 income and married with over $32,097.
