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3 Tax Issues in 2014 You Must Prepare for Now

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You can always count on seeing contentious debate about taxes, with lawmakers having partisan beliefs as well as differing opinions about the best ways to address even the simplest of problems with the tax system. Yet with so much still up in the air with the federal budget, you can expect tax issues in 2014 to come to the forefront of public debate among policymakers, with both sides of each issue jockeying for the best position. Let's look at the tax issues for 2014 that are most likely to come into the public eye.

1. Implementing new taxes.
At the beginning of 2013, new taxes took effect that taxpayers had never seen before. Although those tax laws have been in effect for almost a year, taxpayers haven't actually had to deal with them, and it's only now that the IRS is frantically preparing for the coming 2014 filing season that taxpayers are seeing these new taxes as a potential issue to resolve.

For instance, the net investment income tax came into being at the beginning of the year, imposing a 3.8% tax on high-income taxpayers. At first glance, the tax seems straightforward, with the intent seemingly to tax interest, dividends, capital gains, and other investment income to the same extent as wage income under the existing Medicare withholding tax and the new Medicare surcharge on wage income.

But several outstanding issues haven't been resolved. One of the biggest is whether an investor in a small business is active enough in that business to avoid treatment of its earnings as passive income, which is subject to the tax. Similarly, real-estate-related activities can be difficult to categorize between investment-like income and income for services. Moreover, allocating investment-related deductions to come up with the net investment income figure also creates uncertainty. This could become a tax issue for 2014 and for future years if it's not resolved to taxpayers' satisfaction during the coming tax season.

2. Obamacare tax penalties.
One of the most contentious tax issues for 2014 promises to be the penalties imposed under the Affordable Care Act. Originally, penalties were slated to take effect that would cost people $95 for each adult and $47.50 for each child, with family limits of $285 or 1% of income above applicable filing limits, whichever is greater. Yet already, exemptions to the penalties have been expanded beyond their original scope, with those who've had their previous health-insurance policies cancelled because of the health-care law's provisions being allowed to carry no insurance without paying the penalty.

Moreover, the enforceability of penalties and other Obamacare provisions remains in doubt, with numerous court cases having challenged various aspects of the Affordable Care Act in different jurisdictions. As long as those court cases remain active -- and with the speed of the judicial system, they're likely to remain outstanding for years -- Obamacare-related rules will be big tax issues in 2014 and in future years as well.

3. International tax reform.
For years, corporations have kept billions of dollars overseas in order to avoid having to pay taxes on repatriation of profits. Apple (NASDAQ: AAPL  ) , Cisco Systems (NASDAQ: CSCO  ) , and Oracle (NYSE: ORCL  ) are just some of the highest-profile examples of companies that keep their cash outside the U.S., and despite Congressional investigations, the practice doesn't seem likely to end soon.

Nevertheless, that hasn't stopped Congress from trying. Senate Finance Committee Chairman Max Baucus recently proposed changes to the tax code that would include what's known as "deemed repatriation" of overseas earnings, imposing a one-time tax at a reduced rate on the profits that these and other companies have kept off their U.S. tax returns. Even with provisions for a reduced rate, tax advocates argue that the retroactive nature of the provision would violate fundamental tax policies that would raise issues going well beyond the issue of repatriation.

Prepare for fireworks
Given how much division there is about the appropriate level of taxes people should pay, you can expect there to be a lot of discussion about tax issues in 2014, with plenty of disagreement as well. Even though all these issues might not get resolved, it's smart to know what you can about them in order to prepare for what new tax laws might come about to address those issues.

Be smart about your taxes
Staying aware of important tax issues in 2014 is just one way you can plan to keep your taxes as low as possible. In our brand-new special report "How You Can Fight Back Against Higher Taxes," The Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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