Tax season is underway, and every year there are some changes to the tax laws that can affect how much you owe or how much is refunded to you. If you haven't yet filed your tax return, you need to know what has changed this year so you can better prepare.
We asked three of our experts to explain some of the biggest tax changes you might run into when filing your return and what they might mean to your bottom line.
One of the biggest tax changes people are running into on their 2014 tax returns is the implementation of the individual mandate penalties under the Affordable Care Act. For the first time, taxpayers will have to pay penalties if they don't have health insurance coverage that complies with Obamacare requirements, and the calculations of how much you might owe are complicated enough to confuse many taxpayers.
On one hand, the per-person penalty amounts -- $95 per adult and $47.50 per child up to a family maximum of $285 -- make plenty of sense. Where things get tricky, though, is when your income is high enough that 1% of whatever you earn above the filing threshold for your filing status is greater than the per-person penalty, in which case you'll owe the higher amount.
What's more, these penalties only get worse in 2015. The per-person amounts skyrocket to $325 per adult and $162.50 per child, with a family maximum of $975. What's more, the 1% alternative calculation rises to 2% in 2015, potentially doubling what you'd pay in 2014.
Fortunately, if you qualify for exemptions under Obamacare, then you might not owe the penalty, even if you didn't have coverage in 2014. Nevertheless, with penalties on the rise, it's important to be positive you qualify for an exemption if you want to avoid a big surprise at tax time.
One small tax change that could nevertheless be costly if you make a mistake is the IRS' new "one rollover per year" rule for IRAs.
The rule reads, "Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own." For the purposes of the limit, all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, will be treated as one IRA.
A few things to note:
- This only applies to IRA-to-IRA rollovers -- not rollovers from an employer-sponsored retirement account to an IRA.
- This tax change took effect Jan. 1 2015. Rollovers in 2014 are not affected.
- This does not apply to rollovers from traditional IRAs to Roth IRAs, as these are technically Roth conversions.
The way a rollover works is that an IRA holder withdraws money from one IRA and redeposits the money into another IRA within 60 days. While the money is out, you can do whatever you want with it without incurring any taxes or penalties as you would if you took a withdrawal. People have used this to temporarily loan themselves money and not take a distribution.
There has always been a rule that you can only do this once in a 12-month period, but it used to be that if you had four separate IRAs, for example, you could roll over money from, say, IRA No. 1 to IRA No. 2 and then, in the same 12 months, roll over money from IRA No. 3 to IRA No. 4.
With the rule change, if you roll over money from IRA No. 1 to IRA No. 2, you cannot roll over money from any IRA to another for 12 months. If you violate this rule and make more than one rollover, the amounts may be treated as an excess contribution, and taxed at 6% per year as long as they remain in the IRA.
For most people, this rule simply means that if you transfer multiple IRAs from one broker to another, you will have to do so through direct transfers, which can be more time-consuming than rollovers but are really just as simple.
Other than the new healthcare laws and IRA rollover changes, the 2014 tax year (for which you'll file your return in the coming months) was a pretty slow year for tax changes. Some other big changes nearly took place; for example, the tuition tax deduction and the ability to deduct mortgage insurance nearly expired, but they were extended by Congress at the end of the year.
However, one small tax change that could benefit you is the annual adjustment to the personal exemption, standard deduction, and tax bracket cutoffs for this year. Now, while these increases are designed to keep up with the cost of living and rising wages, if you didn't get a raise in 2014, it could mean some extra money in your pocket at tax time.
The personal exemption has increased from $3,900 to $3,950 for the 2014 tax year, and the standard deduction has gone from $6,100 to $6,200 (and from $12,200 to $12,400 for married couples). Further, the income levels for the tax brackets have all been adjusted upward.
For example, a married couple with no children who earned $100,000 in 2014 and takes the standard deduction will pay about $220 less in taxes this year than they would have in 2013 thanks to these adjustments.