For most people, the biggest change in 2014 is the individual mandate for purchasing health insurance.
If you’re a high-income taxpayer, you may also pay higher tax rates and new taxes.
If you qualify for certain tax breaks, you’ll be glad to know most of them are extended through 2014 or beyond.
See if any of these changes affect you.
The Patient Protection and Affordable Care Act health insurance mandate goes into effect
Starting in 2014, you must carry a minimum level of health insurance for yourself, your spouse, and your dependents, or possibly pay a fine.
If you have adequate health insurance through your employer, you purchase coverage yourself, or you are enrolled in a government program such as Medicaid, you don’t have to do anything different.
If you qualify for an exception; for example, if your income is too low for you to be required to file a return, you won’t have to pay the fine.
If you don’t have coverage or qualify for an exception, you could get hit with a tax penalty of up to 1% of your yearly income or $95 per person for 2014, whichever is higher. The penalties go up in 2015.
New 3.8% Medicare Investment Tax
The Affordable Care Act also mandated an additional 3.8% tax on investment income, including interest, dividends, capital gains, rental and royalty income.
This special tax is collected for Medicare, starting in 2013. You only pay it if your modified adjusted gross income is $200,000 or more ($250,000 if filing jointly, or $125,000 if married filing separately).
You pay the 3.8% tax in addition to tax you already pay on investment income. For example, if you pay 20% tax on a long-term capital gain, your total tax on the gain is 23.8% (20% + 3.8%).
New Medicare Health Insurance Tax on wages
The Affordable Care Act levies a special tax on the wages and other earned income of high-income taxpayers.
You must pay this tax if you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately).
Your employer generally withholds the Additional Medicare Tax from your pay. If you’re self-employed, you should plan for this tax when you calculate your estimated taxes.
This tax went into effect for 2013.
Simplified option for home office deduction
The IRS may have good news for you if you work at home as an employee or are self-employed and take a home office deduction.
Starting in 2013, you can use a simplified option for determining your deduction, based on $5 per square foot of home use for business (up to 300 square feet).
When you take the simplified deduction, you can still deduct mortgage interest and real estate taxes in full as itemized deductions. In addition, you don’t have to worry about calculating depreciation on your home, or recapturing depreciation later when you sell your home.
Thanks to an extension through 2015, you can still get an energy efficiency tax credit for qualifying energy-efficient products such as windows and doors, biomass stoves, and insulation.
The credit is 10% of the cost of your qualified energy efficiency improvements installed during the year, plus any residential energy property costs.
Your total credit for all years after 2005 cannot be more than $500.
Reminder: IRS e-file starts late this year
The IRS will begin processing individual income tax returns starting on January 31, 2014. The IRS is getting a late start accepting e-file returns this year because of the sequester.
However, if you haven’t already, start your TaxACT return now so you can e-file and be first in line for when the IRS begins accepting e-file returns. We’ll hold and then submit your return to the IRS as soon as it starts accepting returns from TaxACT and other tax preparation solutions.
Do you start planning your 2014 tax year as you prepare your 2013 return?