Preparing taxes is never pretty and never easy. With the constant adjustments of tax credits and deductions, and the ever changing qualifying factors for tax breaks, tax preparation is hard work. The new year brings with it many changes in how taxes are assessed. Even if you do not prepare taxes yourself, important to note how much of your income is going to the federal government. For 2014, there is good news and bad news.
In 2014, there will be many changes in how we pay taxes, in part because the Bush tax cuts expired at the end of 2013. Forbes continues: “First, the top tax rate for taxpayers is now 39.6%. We haven’t seen those kind of rates in almost 15 years. Those Bush-era tax cuts have finally expired, giving us the 20th century tax rates (gosh, that sounds really, really old). How high will it go? The 39.6% tax rate kicks in at $400,000 for individual taxpayers and $450,000 for married couples filing jointly.
“All wages are subject to Medicare tax. That hasn’t changed. But now, taxpayers who make over $200,000 ($250,000 for married taxpayers) will be subject to the Medicare surtax. If that’s you, a Medicare surtax will be tacked on to your wages, compensation, or self-employment income over that amount. The amount of the surcharge is 0.9%.
“Even if you aren’t affected by the Medicare tax surcharge, you still may be subject to the Net Investment Income Tax (NIIT) if you have both net investment income and modified adjusted gross income (MAGI) of at least $200,000 for an individual taxpayer and $250,000 for taxpayers filing as married.
“Net investment income includes items like interest, dividends, capital gains, rental and royalty income, and certain income from businesses. It doesn’t include wages, unemployment compensation, operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends and distributions from certain Qualified Plans.”
Taxpayers that do not have health insurance in 2014 and do not qualify for exemptions will have to pay a fee, called the “shared responsibility payment.” The fee is 1% of their taxable income or a flat fee of $95 per adult that is uninsured, whichever is higher. For a child, it is $47.50 per month. The “fee” will increase each year until 2016 ($695 per person) after which it will be adjusted for inflation.
There is good news for the self-employed. Forbes reports: “The self-employed get something of a break in 2014. There is an option to claim a new, simplified deduction for a home office. The deduction is equal to $5/square foot of home office space – up to a maximum of 300 square feet. It’s an easy calculation ($5 x the number of square feet) and beats figuring out your own expenses and pro-rating them though that’s still an option if that works out better for you. The per square foot calculation is intended to save hours more than dollars. The deduction made its first appearance in 2013 but you can also take the deduction in 2014.”
When preparing taxes for 2013, consider the many tax breaks that were available for 2013, but have expired now. Every deduction, however small, means more money in your pocket.