Alas, inflation is put to good use– taxpayers will be seeing its benefits in the form of tax relief in 2014. The mandatory annual inflation-adjustments as provided under the Tax Code should provide relief. According to George Jones, JD, LLM and CCH Senior Federal Tax Analyst:
Indexing for inflation has become an established part of our tax system, and it’s likely to be a part of the tax law for the foreseeable future – even as Congress debates changes to the tax rates themselves. Most taxpayers benefit from inflation adjustments since the adjustments tend to preserve the value of most, but not all, of the dollar-based benefits under the Tax Code year after year.
The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013 will at least guarantee in most cases, a little more money for you. ATRA permanently extends the Bush administration tax cuts. This eliminates the uncertainty that comes every time tax cuts are approach possible elimination and are at the mercy of Congress. ATRA also indexes tax brackets as of 2013.
Indexing of brackets based on the ebb and flow of inflation is a necessity in a difficult economy. The idea indexing is to lower tax bills by putting a larger percentage of people’s incomes into the lower brackets—thus allowing them to pay lower income taxes. With inflation up slightly this year, a formula will be used to assess tax rates. Although some 2014 taxes will stay the same, many will change slightly for inflation. An example ‘status quo’ tax rates is the $14,000 gift tax annual exclusion and the $5,500 limit on IRA contributions, but in most cases, tax rates will be adjusted for inflation giving tax payers relief in the form of savings.
A couple of examples include married couples filing jointly. Couples, for example those making about $100,000 annually, should save about $145 in income taxes in 2014 as compared to the same income for 2013. And in the same way a single filer making half of that annually will save about the same, $72.50 as compared to the same income for 2013.
Additionally, taxpayers will see slightly higher 2014 personal exemption amounts, as well as education credits, (IRA) contributions and more. For 2014 the deduction for children claimed as dependents will remain at the $1,000 level.
Higher-income, Higher Taxes
But says Wolters Kluwer, CCH, the 2013 bracket—currently at $425,000 for taxpayers filing as head of household, single filers at $400,000 and married couples filing separately, at $225,000— will likely go up. For 2014, Wolters Kluwer, CCH projects that these amounts will rise to $457,600, $432,200, $406,750, and $228,800, respectively.
Higher-income taxpayers also must face two new Medicare taxes that started in 2013. They are the 3.8-percent surtax on net investment income and a 0.9-percent Medicare contributions tax on earned income. …triggered when a taxpayer’s wages, compensation, or self-employment income exceed these same threshold amounts. These amounts, however, are not adjusted for inflation and therefore remain the same for 2014.
Inflation Adjustments for Standard Deductions
Most taxpayers will see a boost in their allowed personal exemption amounts as well even for higher income brackets. While the personal exemption phase out (PEP) or Pease Limitation still applies. The 2014 phase out range for personal exemptions begins at $305,050 for joint filers and $254,200 for single filers. According to a recent Forbes article titled, 2014 Tax Brackets, Exemption Amounts Likely to Save Tax Dollars, the changes should amount to more dollars in your pockets:
…the Pease limits were expected to be reduced beginning in 2006 and eliminated in 2010 but the elimination was extended through the end of 2012. The limitations were brought back in 2013 at the original thresholds, indexed for inflation. The result of those changes is basically an increase in the top marginal tax rates.
If you need more guidance regarding your allowed personal exemptions, tax bracket clarity, or charitable tax exemptions, call Joel Lewinson, dedicated CPA in Woodland Hills at 818-593-6777 for all of your tax accounting needs.
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