This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
Welcome 2014! As the new year rolls around, it's always a sure bet that there will be changes to the current tax law and 2014 is no different. From health savings accounts to retirement contributions and standard deductions, here's a checklist of tax changes to help you plan the year ahead.
Filing Season Delayed by 10 Days
Taxpayers should note that the 2014 tax season opens on Jan. 31, 2014.
In most years, the filing season opens on Jan. 21; however, due to the 16-day government shutdown that took place in October 2013, the filing season is delayed by 10 days this year. No returns, paper or electronic, will be processed by the IRS before this date.
The April 15 tax deadline is set by statute and will remain in place, although taxpayers can request an automatic six-month extension to file their tax return. If you think you need an extension, please let us know.
For 2014, more than 40 tax provisions are affected by inflation adjustments, including personal exemptions, AMT exemption amounts, and foreign earned income exclusion, as well as most retirement contribution limits.
For 2014, the tax rate structure, which ranges from 10 to 39.6 percent, remains the same as in 2013, but tax-bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation. For details see the article, "Tax Brackets, Deductions, and Exemptions for 2014," below.
Alternative Minimum Tax (AMT)
Exemption amounts for the AMT, which was made permanent by the American Taxpayer Relief Act (ATRA) are indexed for inflation and allow the use of nonrefundable personal credits against the AMT. For 2014, the exemption amounts are $52,800 for individuals ($51,900 in 2013) and $82,100 for married couples filing jointly ($80,800 in 2013).
For taxable years beginning in 2014, the amount that can be used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $1,000 (same as 2013). The same $1,000 amount is used to determine whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax". For example, one of the requirements for the parental election is that a child's gross income for 2014 must be more than $1,000 but less than $10,000.
For 2014, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to "kiddie tax" is $2,000.
Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2014, a qualifying HDHP must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage (unchanged from 2013) and must limit annual out-of-pocket expenses of the beneficiary to $6,350 for self-only coverage (up $100 from 2013) and $12,700 for family coverage (up $200 from 2013).
Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high deductible health plan (HDHP).
Self-only coverage. For taxable years beginning in 2014, the term "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,200 (up $50 from 2013) and not more than $3,250 (up $50 from 2013), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,350 (up $50 from 2013).
Family coverage. For taxable years beginning in 2014, the term "high deductible health plan" means, for family coverage, a health plan that has an annual deductible that is not less than $4,350 (up $50 from 2013) and not more than $6,550 (up $100 from 2013), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,000 (up $150 from 2013).
AGI Limit for Deductible Medical Expenses
In 2014, the deduction threshold for deductible medical expenses remains at 10 percent (same as 2013, but up from 7.5 percent in 2012) of adjusted gross income (AGI); however, if either you or your spouse were age 65 or older as of December 31, 2013, the new 10 percent of AGI threshold will not take effect until 2017. In other words, the 7.5 percent threshold continues to apply for tax years 2013 to 2016 for these individuals. In addition, if you or your spouse turns age 65 in 2014, 2015, or 2016, the 7.5 percent of AGI threshold applies for that year through 2016 as well. Starting in 2017, the 10 percent of AGI threshold applies to everyone.
Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2014, the limitation is $370. Persons more than 40 but not more than 50 can deduct $700. Those more than 50 but not more than 60 can deduct $1,400, while individuals more than 60 but not more than 70 can deduct $3,720. The maximum deduction $4,660 and applies to anyone more than 70 years of age.
The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly), which became effective last year, in 2013, remains in effect for 2014, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,00 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts and self-employed individuals are all liable for the new tax.
Foreign Earned Income Exclusion
For 2014, the foreign earned income exclusion amount is $99,200, up from $97,600 in 2013.
Long-Term Capital Gains and Dividends
In 2014 tax rates on capital gains and dividends remain the same as 2013 rates; however threshold amounts are indexed for inflation. As such, for taxpayers in the lower tax brackets (10 and 15 percent), the rate remains 0 percent. For taxpayers in the four middle tax brackets, 25, 28, 33, and 35 percent, the rate is 15 percent. For an individual taxpayer in the highest tax bracket, 39.6 percent, whose income is at or above $406,750 ($457,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been permanently extended (and indexed to inflation) for taxable years beginning after December 31, 2012, and in 2014, affect taxpayers with income at or below $254,200 for single filers and $305,050 for married filing jointly.
Estate and Gift Taxes
For an estate of any decedent during calendar year 2014, the basic exclusion amount is $5,340,000, indexed for inflation (up from $5,250,000 2013). The maximum tax rate remains at 40 percent. The annual exclusion for gifts also remains at $14,000.
Individuals - Tax Credits
In 2014, a non-refundable (only those individuals with tax liability will benefit) credit of up to $13,190 is available for qualified adoption expenses for each eligible child.
Earned Income Tax Credit
For tax year 2014, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $6,143, up from $6,044 in 2013. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credit
For tax year 2014, the child tax credit is $1,000 per child.
Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2014. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Individuals - Education
American Opportunity Tax Credit and Lifetime Learning Credits
The American Opportunity Tax Credit (formerly Hope Scholarship Credit) was extended to the end of 2017 by ATRA. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return.
Interest on Educational Loans
In 2014 (as in 2013), the $2,500 maximum deduction for interest paid on student loans is no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers with modified AGI of more than $65,000 ($130,000 joint filers).
Individuals - Retirement
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $17,500. Contribution limits for SIMPLE plans remains unchanged at $12,000. The maximum compensation used to determine contributions increases to $260,000 (up $5,000 from 2013).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $60,000 and $70,000, up from $59,000 and $69,000 in 2013.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple's modified AGI is between $181,000 and $191,000, up from $178,000 and $188,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000.
In 2014, the AGI limit for the saver's credit (also known as the retirement savings contribution credit) for low and moderate income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.
Standard Mileage Rates
The rate for business miles driven is 56 cents per mile for 2014, down from 56.5 cents per mile in 2013.
Section 179 Expensing
For 2014 the maximum Section 179 expense deduction for equipment purchases decreases to $25,000 of the first $200,000 of business property placed in service during 2014. The bonus depreciation of 50 percent is gone, as is the accelerated deduction, where businesses can expense the entire cost of qualified real property in the year of purchase.
Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, in 2014 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $130 down from $245 in 2013. The monthly limitation for qualified parking is $250.
While this checklist outlines important tax changes for 2014, additional changes in tax law are more than likely to arise during the year ahead.
Don't hesitate to call us if you want to get an early start on tax planning for 2014. We're here to help!
Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination?
Not quite. You can't let your business run on autopilot and expect good results. Any business owner knows you need to make numerous adjustments along the way - decisions about pricing, hiring, investments, and so on.
So, how do you handle the array of questions facing you?
One way is through cost accounting.
Cost Accounting Helps You Make Informed Decisions
Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions - raw materials, labor, inventory, and overhead, among others.
Note: Cost accounting differs from financial accounting because it's only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.
Cost accounting allows you to understand the following:
Is It Hard?
To monitor your company's costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.
Fixed costs don't fluctuate with changes in production or sales. They include:
Variable costs DO change with variations in production and sales. Variable costs include:
Tip: Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company's functioning.
We Can Help
If you'd like to better understand the ins and outs of your business and create sound guidance for internal decision making, you might consider cost accounting.
And we can help. Allow us to evaluate your business from top to bottom and determine the real cost of each component. With that as a foundation, we can help you draft budgets, adjust pricing, keep an appropriate level of inventory, and much more. Give us a call today.
Due to current economic conditions, it's likely that collecting on your accounts receivables is becoming more and more of a challenge. Strengthening your collection procedures may allow you to improve collection rates and shorten the aging days of your accounts receivables.
The following suggestions will help your business improve its cash flow and tighten up its credit and collections policies. Some of the tips discussed here may not be suitable for every business, but can serve as general guidelines to give your company more financial stability.
Define Your Policy. Define and stick to concrete credit guidelines. Your sales force should not sell to customers who are not credit-worthy, or who have become delinquent. You should also clearly delineate what leeway salespeople have to vary from these guidelines in attempting to attract customers.
Tip: You should have a system of controls for checking out a potential customer's credit, and it should be used before an order is shipped. Further, there should be clear communication between the accounting department and the sales department as to current customers who become delinquent.
Clearly Explain Your Payment Policy. Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.
Tip: Make sure invoices include a telephone number and website address so customers can contact you with billing questions. Also include a pre-addressed envelope.
Tip: The faster invoices are sent, the faster you receive payment. For most businesses, it's best to send an invoice with a shipment, rather than afterward in a separate mailing.
Follow Through on Your Stated Terms. If your policy stipulates that late payers will go into collection after 60 days, then you must stick to that policy. A member of your staff (but not a salesperson) should call all late payers and politely request payment. Accounts of those who exceed your payment deadlines should be penalized and/or sent into collection, if that is your stated policy.
Train Staff Appropriately. The person you designate to make calls to delinquent customers must be apprised of the seriousness and professionalism required for the task. Here is a suggested routine for calls to delinquent payers:
In 2014, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation.
By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2014 returns, filed by most taxpayers in April 2015, include the following:
We'll be glad to help with all of your tax planning needs in 2014. Give us a call today!
Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) used for business, charitable, medical or moving purposes is:
The business, medical, and moving expense rates decrease one-half cent from the 2013 rates. The charitable rate remains unchanged from 2013 and is based on statute.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, whereas the rate for medical and moving purposes is based on the variable costs.
As always, taxpayers have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates; however, a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
Let us know if you have any questions about standard mileage rates and which driving activities you should keep track of as tax year 2014 begins.
Low and moderate-income workers still have time to make qualifying retirement contributions and get the saver's credit on their 2013 tax return.
Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply and helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs.
The saver's credit supplements other tax benefits available to people who set money aside for retirement. Taxpayers have until April 15, 2014, to set up a new individual retirement arrangement or add money to an existing IRA for 2013.
Most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.
Note: Elective deferrals (contributions) must have been made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees.
The saver's credit can be claimed by:
The saver's credit can increase a taxpayer's refund or reduce the tax owed. The maximum saver's credit is $1,000 for single filers and $2,000 for married couples and is based on filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.
Other special rules that apply to the saver's credit include the following:
In tax-year 2011, the most recent year for which complete figures are available, saver's credits totaling just over $1.1 billion were claimed on nearly 6.4 million individual income tax returns. Saver's credits claimed on these returns averaged $215 for joint filers, $166 for heads of household and $128 for single filers.
Please call us if you have any questions about the saver's credit. We're here to assist you.
Employees - who work for tips. If you received $20 or more in tips during December, report them to your employer. You can use Form 4070, Employee's Report of Tips to Employer.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2013.
Individuals - Make a payment of your estimated tax for 2013 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2013 estimated tax. However, you do not have to make this payment if you file your 2013 return (Form 1040) and pay any tax due by January 31, 2014.
Employers - Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2013.
Farmers and Fisherman - Pay your estimated tax for 2013 using Form 1040-ES. You have until April 15 to file your 2013 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2013 return and pay any tax due by March 3, 2014, to avoid an estimated tax penalty.
Employers - Give your employees their copies of Form W-2 for 2013 by January 31, 2014. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by January 31.
Businesses - Give annual information statements to recipients of 1099 payments made during 2013.
Employers - Federal unemployment tax. File Form 940 for 2013. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 11 to file the return.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2013. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2013 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040) for 2013. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of last installment.
Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.
Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2013. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2013 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.
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