We don't always think of the U.S. tax code as a dynamic thing, but it is. According to the Tax Foundation, the entire tax code contained some 409,000 words back in 1955. To say that it has changed a little since then would be an understatement: Our National Taxpayer Advocate, Nina Olson, has noted that the tax code now takes up about 4 million words.
Each year brings changes and new taxes. Below are some new tax rules and taxes for 2014 that you might like to know about. Some are debuting for the first time in 2014. Others others actually began in 2013, but you’ll be paying them for the first time in 2014, when you file your 2013 return in the next few months. (Note that many of these new taxes for 2014 apply to rather wealthy folks. Average earners needn't hyperventilate.)
A new bracket
The tax year 2013 brought us a new top tax bracket, so the tax returns you file on or before April 15 this year will feature some people sending Uncle Sam a bigger portion of their income. The previous top rate was 35% (and this bracket still exists). However, those with taxable incomes of more than $400,000 (for single filers) or $450,000 (married, filing jointly) will see some of their income taxed at 39.6%. You can expect the same top rate in 2014, but the income level triggering it will be slightly higher.
Some long-term capital-gains taxes rise
New taxes in 2014 cover a wide range of categories, such as the capital-gains taxes you pay on investment gains. The top long-term capital-gains rate has been 15% for most folks for quite a while now. Beginning in 2013, though, those in the top tax bracket faced a 20% rate. Thus, if you’re a high earner, the taxes you pay on 2013 gains in the return you file in the coming months might be a bit steeper than you expected.
Estate taxes higher
Not too long ago, estate values in excess of $1 million were taxed. That exemption has been hiked in recent years and will now be indexed for inflation annually. For 2013, the exemption is $5.25 million ($10.5 million for married couples), and for 2014, it’s $5.34 million ($10.68 million for married couples). Estate values above those levels are getting taxed at 40% -- up from 35% in 2012. So if you're filing an estate-tax return in the coming months for someone who died in 2013, keep those higher rates and exemptions in mind.
Payroll taxes return from vacation
Ordinary employees have been paying higher Social Security payroll taxes all year long in 2013, but if you're self-employed, you might only run into these higher taxes when you're filing your 2013 return in the coming months. This new tax was actually just the return of an old tax: Most of us enjoyed a payroll tax holiday that lasted from 2011 through 2012 and reduced the 6.2% withholding on wages to 4.2% -- temporarily. In 2013, the Social Security payroll tax rate returned to 6.2%, though only on wages up to $113,700 for 2013. For self-employed people, you're responsible for the employer half of the Social Security payroll tax as well, bringing the total amount to 12.4% If you earn $1,113,700, that million dollars above the cap doesn't get hit with the tax. (Thus it's considered a "regressive" tax, affecting less wealthy folks more.)
New Obamacare taxes
As Obamacare health insurance rolls out across the country, so do some new taxes supporting it. Most took effect in 2013, but you might not notice them until you’re preparing your return this year. The Medicare payroll tax, for example, got increased for high earners. Most of us face a 2.9% rate, with half of that tax (1.45%) coughed up by our employer and only half by us. Beginning in 2013, single tax-filers were charged an extra 0.9% on earned income exceeding $200,000. (For married-filing-jointly folks, it's 0.9% income above $250,000.) Thus high earners will pay 1.45% on earnings up to $200,000 (or $250,000) and then 2.35% (1.45% plus 0.9%) on further earnings.
New taxes you may first notice in 2014 include a new Medicare surtax, too. As the folks at Fidelity have explained, "A 3.8% surtax will be due on the lesser of your net investment income for the year, or the amount by which your 'modified adjusted gross income' -- or MAGI -- exceeds those income thresholds." And yes, if you're a high earner, you might get hit with both the 0.9% tax hike and the 3.8% surtax. (Note that one applies to your earned income and the other to investment income.)
More than 50 tax breaks expired in 2013, so you can expect some new taxes in 2014 -- or higher taxes -- unless some or many of them are reinstated. That may well happen, as many tax breaks are repeatedly renewed. Expiring breaks include a deduction of up to $250 for teachers who buy classroom supplies with their own money and a deduction of up to $4,000 for qualified tuition and related expenses -- and more. Note that unlike many of the taxes described above that actually took effect in 2013, these breaks remained in effect through 2013 and you can still claim them on the 2013 tax returns you'll prepare in the coming months. But for now, they're scheduled to disappear in 2014.
But wait -- there's more!
These are just some of the tax changes or new taxes for 2014 that taxpayers will face. Keep in mind that it's not all bad. Most folks will see those who are far wealthier getting hit harder by tax increases. And many changes to the tax code are generally welcome, such as indexing the dreaded Alternative Minimum Tax to inflation. And thanks to the striking down of the Defense of Marriage Act, those in same-sex marriages will now be treated by the IRS as legally married and entitled to corresponding tax treatments -- both good and bad.
The more you know about taxes and 2014's new taxes in particular, the better you can plan and the less you'll likely pay. Keep up with new taxes in 2014, as the rules change frequently.
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