December is here, which can mean only one of three things: It's time to buy gifts; it's time to stuff our bellies full of home-cooked food; and it's time to start thinking about your taxes!
Although tax time comes around but once a year, it's really a year-round effort on your part to dot your I's and cross your T's. Having a full understanding of your wages and investments, and keeping all pertinent paperwork organized, can make a big difference come April 15. December is also your last chance to make a number of key moves before it's too late, such as adding to your 401(k) or tax-loss harvesting to potentially reduce your capital gains or a portion of your wages.
Then again, the end of the year is also the time when Congress and the IRS lay out what tax code changes have been made for the year. Since 2001, Congress has enacted about 5,000 tax code changes to the nearly 4 million words that comprise the U.S. tax system. For you novel lovers out there, this works out to more than 60 books! It's no wonder most taxpayers wind up running for cover around tax time.
Congress made five big changes to your taxes
Recently the IRS announced a number of key changes to the tax code moving forward. While it would take all day to hit every point, here are the five major changes to your taxes that you need to be aware of.
No. 1: Affordable Care Act penalties take shape
The biggest tax code change is the implementation of the Affordable Care Act, which is better known by its shorthand, Obamacare.
The actionable component of Obamacare, known as the individual mandate, requires that consumers purchase health insurance or face a penalty that in 2014 was the greater of $95 or 1% of their annual income. There are quite a few ways to be exempt from the individual mandate, including being a Native American, belonging to a select religious group, or simply proving that health insurance would have cost you a high percentage of your adjusted gross income each year. However, if you didn't have health insurance for a period longer than three months last year, you are in violation of the individual mandate and are expected to pay the penalty. The IRS plans to use an honor system for your upcoming taxes, in which you'll confirm or deny having health insurance in 2014.
If you are owed a refund, the IRS will simply deduct the penalty and send you the remainder. However, the IRS can't garnish wages or seize the property of those who owe the penalty, so in theory those people who owe the IRS money at the end of the year may not wind up paying the penalty.
In tax year 2015 this penalty will rise to the greater of $325 or 2% of your annual income.
No. 2: Health Flexible Spending Accounts get more confusing
It was a big year for health care-related tax changes. Through your employer, you may have the option of taking advantage of a Flexible Spending Account (FSA) or a Health Saving Account (HSA) to help pay for future medical expenses. These plans are particularly intriguing, as you can add pre-tax dollars to help fund your medical costs.
But HSAs tend to garner most of the spotlight because they're more flexible. You can add funds pre-tax and post-tax, and most importantly, you can roll the funds over from year to year without losing them (something that previously couldn't be done with an FSA). In 2013 Congress made a change allowing people to roll over up to $500 in their FSA into 2014. However, Congress this year made a change so that if you carry over $500 into 2015, you'll be disallowed from participating in an HSA in 2015 -- period! Considering the flexibility afforded by HSAs, this is something for consumers to really think about if they're considering rolling some of their FSA money forward next year.
No. 3: Bitcoin becomes taxable next year
Bitcoins may not be tangible, but they're going to be generating some very real taxable cash flow for the U.S. government!
According to tax laws passed this year, bitcoin, the extremely volatile virtual currency that's garnered a lifetime's worth of media attention over the past couple of years, will be taxable if you've received it as a payment for goods and/or services rendered, or if you've invested in bitcoin and earned money doing so. Individuals receiving bitcoin as a payment will have to place a fair market value on their bitcoin and include this value with their annual income statement, while investors and those who provided services in exchange for bitcoin will be exposed to a slightly different tax calculation.
No. 4: The inflationary bump for tax year 2015
Inflation rears its head once again, with a number of key deductions and taxable caps moving up. This is really more than just a "single" change, but to simplify things, here are the most pertinent inflation-based figures that will change as we enter 2015 (note these apply to your April 15, 2016 filing).
- The standard deduction will rise by $100 for singles and married persons filing separately, by $200 for married couples filing jointly, and by $150 for those who can claim head of household.
- The Alternative Minimum Tax exemption amount for 2015 will rise to $53,600 from $52,800 in 2014.
- In 2015 the FSA contribution limit will rise by $50 to $2,550.
- The top marginal tax bracket of 39.6% will affect individuals whose income exceeds $413,200, or $464,850 for married taxpayers filing a joint return.
No. 5: IRA rollover limits kick in for 2015
Finally -- and this also goes into effect in 2015 for your April 2016 filing -- Congress put a cap on the number of individual retirement account rollovers you can conduct in a rolling 12-month period.
Under the new terms, individuals will be allowed to withdraw funds from one IRA, hold those funds for up to 60 days without penalty, and then deposit them into a different IRA once every 12 months. This includes SEP and SIMPLE IRA's, as well as Roth and Traditional IRA's -- they're all treated as one IRA. If you wind up withdrawing more than one IRA, the proceeds can be taxed at an ordinary income rate and could potentially be exposed to the 10% early withdrawal tax. Not to mention that if the rollover amount exceeds your allowable IRA contribution, you could face a 6% excise tax.
Knowledge is power
Keeping up on your taxes isn't fun, but it's an important to ensuring you retain as much of your income as possible. While not all of the above changes may apply to you, there's more than likely a nugget of wisdom buried in these changes that could help you better position yourself financially in the upcoming year.