Buzz
The Affordable Care Act is the cornerstone of tax law reforms this year. In fact, it's the most substantial change to the tax code in two decades. It's a complex topic, so we'll set it aside for now. Apart from the ACA, there are several notable changes that may impact you when filing your 2014 tax return.
This article was first published on GOBankingRates.
Pell Grants, Living Expenses, and Education Credits
Most students will automatically count their Pell Grant funds as used for qualified educational expenses, as their school applies the grant to tuition. While this isn't incorrect, this amount reduces the expenses available for claiming education credits such as the American Opportunity Credit.
Pell Grants can now be used for living expenses, up to the total amount of actual living costs — even if your college initially applied the Pell Grant to tuition and fees. The grant amount will count as taxable income, but this approach could be beneficial for maximizing the education credit. This change impacts nearly 9 million students. (Note: More information on this will be released by the IRS. It's also wise to seek advice from a tax professional to address your individual circumstances, as this can get complicated.)
Bitcoin
If you received virtual currency payments this year, you must include the fair market value of those payments as part of your annual income. So yes, it is taxable. Different tax rules apply if you invest in virtual currency or receive it as payment for services.
Saving for Health Care
Health Flexible Spending Accounts (FSAs) typically follow a use-it-or-lose-it rule. You can contribute pre-tax dollars to cover healthcare expenses, but those funds must be used within the same plan year. Since 2013, you can roll over up to $500 from an FSA into the next plan year. And now, there’s another update to consider.
If you have an FSA this year and roll over $500 into 2015, you will not be eligible to participate in a Health Savings Account (HSA) for the entire year. This rule applies only to general purpose FSAs, not those designated for specific purposes like dependent care or dental expenses.
You may need to plan ahead due to this new restriction. As Kevin Martin, a tax attorney at The Tax Institute at H&R Block, advises, "If you’re planning to establish an HSA for 2015, it’s best to avoid carrying over unused FSA funds, even if it means forfeiting them."
Unemployment Benefits
Losing a job is both mentally and financially challenging. For many, unemployment benefits offer crucial support while they search for a new position. Unfortunately, these benefits are taxable. You will receive either Form W-2 or Form 1099-G, which details the amount of benefits received. Use these forms to file your taxes.
Additionally, a recent U.S. Supreme Court ruling clarified that any additional unemployment compensation — not related to state unemployment benefits — paid by a former employer to a laid-off employee will be considered taxable wages, meaning that social security taxes must be withheld from these payments.
IRA Rollover Rules Starting in 2015
This is a tax change for 2015 — it won't affect your 2014 tax return, but it will impact your savings this year. Starting January 1, 2015, you can only perform one rollover from one IRA to another within a 12-month period. A rollover involves withdrawing funds from one IRA, holding them for less than 60 days, and then depositing them into another IRA account.
Taxpayers can still make an unlimited number of trustee-to-trustee transfers throughout the year. (This means you can instruct Bank "A" to send your IRA funds directly to Bank "B" — the money is never withdrawn or in your possession.) If you complete more than one rollover, the subsequent withdrawals will be taxed at ordinary income rates, with an additional 10 percent early withdrawal penalty. Furthermore, the disallowed rollover will count towards the regular IRA contribution limits. If the rolled-over amount exceeds your allowable contribution, it will be treated as an excess contribution and subject to a 6 percent excise tax. The key takeaway: Be very careful when withdrawing IRA funds in 2015 and beyond.
Foster Care
Typically, the term "foster care" brings to mind a child being placed in temporary care with an unrelated family. While that is correct, the tax definition is now broader. If you provide non-skilled medical services or care for an individual living in your home with physical, mental, or emotional issues, and you receive payments from the state or a certified Medicaid provider, these payments can likely be excluded from your taxable income — even if the person is a relative.
This new IRS guidance represents a complete reversal of its previous stance," said Lynn Ebel, a tax attorney and manager at The Tax Institute at H&R Block. "Previously, the IRS taxed money received for caring for relatives, since they didn’t meet the criteria under tax-free rules for being considered a foster child. However, with this new clarification, taxpayers who care for family members can now receive the same tax-free benefits.
However, as tax-free income, it does not count as earned income for calculating the Earned Income Credit.
Keeping Up With Inflation (or The Joneses)
While the changes are not drastic, several core aspects of tax filing have been adjusted for inflation in 2014. You will now fall into the highest — 39.6 percent — tax bracket if your adjusted gross income exceeds the following amounts:
$228,800 for married filing separately
$406,750 for single
$432,200 for head of household
$457,600 for married filing jointly
The standard deduction amounts have seen a slight increase. For single or married filing separately, it is now $6,200, a $100 rise from 2013. For head of household, it is $9,100, an increase of $150. For married filing jointly or qualifying widow(er), it is $12,400, a $200 increase. These amounts will be higher if you're over 65 years old or if you are blind.
Lastly, each exemption claimed in 2014 is worth $3,950, which is a $50 increase from the previous year.
The Extenders
The American Taxpayer Relief Act of 2012 extended 55 tax benefits that expired on December 31, 2013. This means if you filed your 2014 return today, you would not be able to claim any of those expired benefits. However, since your 2014 tax return isn't due until April 15, 2015, it's possible Congress may choose to extend some or all of the expired benefits before that time. Of the expired benefits, 12 affect individuals and 14 affect small businesses. These include:
The higher education tuition deduction, allowing taxpayers to deduct between $2,000 and $4,000 of qualified tuition expenses.
Energy credits, including those for home improvements that enhance energy efficiency, such as heating and cooling systems, insulation, and windows.
Educator expense deduction, which allows teachers to deduct up to $250 of unreimbursed classroom expenses.
Image courtesy of 401(k) 2012.
