The upcoming change of the calendar from 2014 to 2015 brings a number of critical tax changes that consumers need to be aware of if they wish to maximize their income and minimize the amount of taxes they pay.
Since 2001, Congress has enacted more than 5,000 tax code changes, and this doesn't even include the inflation-adjusted changes that the Internal Revenue Service implements each year. That's a mountain of changes for a tax code that now has close to 4 million words. Keeping up with the biggest tax changes each year can be something of a chore, especially if you eschew do-it-yourself tax software and tax professionals in favor of handling your own taxes.
With that in mind, today we'll take a look at a few of the biggest tax changes for 2015 and examine how they might affect you.
IRA rollover limits
There's no tax change with more significance, in my opinion, than the modifications being made to individual retirement account rollovers in 2015.
As it stands now, and through the remaining days of 2014, you can roll over a tax-advantaged IRA such as a SIMPLE IRA, SEP IRA, or traditional or Roth IRA, hold that money for up to 60 days, and then redeposit it into a new IRA without paying any taxes or penalties. However, beginning in 2015, one of biggest tax changes investors will see is the government limiting taxpayers to one IRA rollover per year. All of the aforementioned IRAs count as a single plan. Thus, if you have both a traditional IRA and a Roth IRA and want to roll them both over into a different IRA, you would have to choose between one or the other, otherwise you'd wind up paying a potentially hefty penalty.
According to the IRS, the penalty for rolling over more than one IRA in 2015 would be the account holder's ordinary income tax rate on the proceeds, a 10% penalty if it was an early withdrawal (before age 59-1/2), and a potential 6% excise tax if the rollover amount exceeds their annual allowable IRA contribution limit. In other words, if you're planning to make multiple IRA rollover moves, you'll want to get the ball rolling before 2015 hits.
FSA rollover changes
With the cost of healthcare on the rise, some consumers have turned to tax-advantaged health spending accounts offered through their employers that allow them to add pretax income to help cover their medical expenses.
The two types of accounts in question are a Flexible Spending Account, or FSA, and a Health Saving Account, or HSA. FSAs have a maximum annual contribution limit of $2,550 as of 2015. Prior to 2013, the unused balance was not allowed to be rolled over into subsequent years (until a Congressional change in 2013 that allowed up to $500 to be rolled over into 2014). In short, you had a "use it or lose it" clause with an FSA.
An HSA, on the other hand, will have a maximum contribution limit of $3,350 per year as of 2015, and you can roll over the unused funds into subsequent years. Furthermore, HSAs occasionally get money added to them by your employer in a similar fashion that your employer would add to your 401(k). Because of this flexibility, HSAs are often preferred over FSAs.
What's worth noting in 2015 is a big tax change stating that if consumers roll over the maximum of $500 from 2014 into 2015 in their FSA, they'll be completely barred from participating in an HSA in 2015. Although Congress' intent was to ensure that not all FSA money was lost if it wasn't used, giving up the ability to use a more flexible HSA may not be a good choice. Each situation will be different, but your best bet might be losing whatever is leftover in your FSA so you have the opportunity to participate in a more flexible HSA in 2015.
Tax extenders go away
Finally, even though it seems like we have this discussion every December, 55 different tax extenders that Congress agreed to pass retroactively for 2014 this past week are set to expire on Dec. 31, 2014.
Altogether, these tax breaks are worth $41.6 billion, with 20% of the breaks targeted at individuals. The two biggest tax deductions that consumers may have to say farewell to in 2015 are debt forgiveness related to short-sales and state and local sales tax write-offs.
Individuals who were underwater on their home and who negotiated a short-sale with their lender would normally have to pay taxes on the difference between the negotiated sale price of their home and their remaining mortgage. One current tax break allows that debt to be forgiven, meaning short-sellers aren't paying what could amount to a huge tax bill.
For individuals who live in a state that has no income tax, such as Washington or Nevada, residents have the option of writing off a portion of their sales tax paid as an itemized deduction. If the tax extenders go away, this deduction will as well.
Businesses, on the other hand, could stand to lose hefty research credits, credits for hiring disadvantaged workers, and a bevy of alternative-energy credits for going green. Between falling fossil-fuel prices and a cloud of uncertainty surrounding tax extenders in 2015, it could be a rough year for alternative-energy companies.
It's possible these tax extenders could be reinstated again next year, but at the moment we have to run with the assumption that they won't be.
Now that you have a better understanding of the biggest tax changes in 2015, you're prepared to enter the new year with income maximization and tax liability reduction in mind.