Monday, January 6, 2014

What to Know About New 2014 Tax Brackets

Income tax brackets have been updated for the 2014 tax year (those taxes due on April 15, 2015), and for a change, a little bit of inflation may be a good thing for some filers. While the changes won't be dramatic, anyone who expects to earn near the top end of a bracket will want to pay close attention and be sure to keep track of expenses carefully to avoid jumping into the next bracket.


The new tax brackets have been updated as mandated to prevent, among other issues, what is called bracket creep, where filers may end up in a higher income tax bracket while simultaneously getting less in credits due to inflation.

The changes to the tax rates are fairly minimal, but may especially be of interest to people who are normally on the very high end of one bracket, expect to earn more in 2014 than in prior years, or if much of the tax rate is dependent on writing off expenses. According to the Internal Revenue Service, the adjusted brackets are as follows:


The change represents a savings of about $145 for a married couple earning about $100,000 after exemptions who are filing jointly.

The standard deduction and personal exemption will also be adjusted slightly. The standard deduction will increase by $100, and for married couples filing jointly, it will increase by $200. The personal exemption will rise by $50.

2014 Standard Deduction and Personal Exemption Filing Status and Deduction Amount

Single: $6,200
Married Filing Jointly: $12,400
Head of Household: $9,100
Personal Exemption: $3,950

The alternative minimum tax (AMT) has also been adjusted for inflation and will now be regularly indexed to inflation. The 2013 exemption of $80,800 for married joint filers will rise by $1,300 in 2014. For single filers it will rise by $900 from the $51,900 level in 2013.

2014 AMT Filing Status and Exemption Amount

Single: $52,800
Married Filing Jointly: $82,100
Married Filing Separately: $41,050

Contributions to 401(k), 403(b) and most 457 plans will remain at $17,500 for those under 50 years of age. The $5,500 limit on contributions will remain unchanged for individual accounts such as Roth IRA investments. These will be adjusted to inflation, but only after increasing by a total of $500, and restrictions apply for some individuals who also have an employer-provided plan in addition to the individual plan. Much more detailed information on retirement and pension accounts can be found at IRS.gov.

Several provisions in the tax code won't be adjusted for or indexed to inflation, including a new 3.8 percent investment income surtax on net income gained from investments. Also excluded is the .9 percent Medicare tax on earned income for joint filers making over $250,000, or $200,000 for single filers.

Income limits for the American Opportunity Credit also escape adjustment to inflation, with adjusted gross income remaining at $80,000 for single filers and $160,000 for married couples filing jointly. Many Americans use the latter credit for education-related expenses, so anyone near the limits and planning to use this credit should pay close attention to the numbers to avoid surprises at the end of the tax year.

The rate for the tax exclusion on annual gifts won't change for 2014, which rose by $1,000 to $14,000 in 2013. However, the lifetime gift and estate tax exemption was made permanent and indexed for inflation for 2014, rising to $5.34 million per person, compared to $5.25 million in 2013.

Because the changes overall are modest, they will mostly be of concern to anyone at the high margins of each of the provisions. But for those who manage to stay in a lower bracket, thanks to the adjustments for inflation, the changes will certainly be welcome.

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