Tax Planning: Income Tax Changes for Individuals

This is the third post in a series discussing tax planning for businesses and individuals in the face of upcoming and existing changes. The first post of this series focused on expired tax extenders and the second post focused on Affordable Care Act requirements.

Last year, a number of late-stage law changes, including the passage of expired tax credits (known as “tax extenders”) and Affordable Care Act deadline changes, made tax planning more challenging than usual for individuals.

Now that tax season is in full-swing, it’s important to understand the changes that were made and how they might affect you, including your requirements under the Affordable Care Act and any opportunities that exist to claim tax credits, deductions and exemptions to put more money back into your pocket.

Below are just a few of the tax changes to be aware of when filing your individual income tax return this year.

Your Affordable Care Act responsibility

The single largest change to the tax code in 20 years, the Affordable Care Act (ACA) is presenting unique challenges to individuals filing their federal tax returns.

For tax-year 2014, the ACA required each individual and his or her dependents to have minimum essential coverage for every month of the year.

When filing your income tax return, you need to indicate whether you and (if applicable) your spouse and dependents had health coverage in 2014. If you didn’t have coverage through an employer, it’s possible that you may qualify for an exemption. To determine your exemption eligibility, file IRS Form 8965, Health Coverage Exemptions, and attach it to your tax return.

If you didn’t have health insurance coverage in 2014 and you don’t qualify for an exemption, you will be required to make a shared responsibility payment for every month that you weren’t covered.

If you enrolled in health insurance coverage through the Health Insurance Marketplace, you may be eligible for the Premium Tax Credit, which provides financial assistance to pay the premiums by reducing the amount of tax that you owe and may result in a refund. In order to qualify, you need to file Form 8965 and elect the credit.

It’s important to understand your ACA responsibility before filing your tax return so you don’t find yourself in trouble with the IRS.

Qualifying for available tax credits, deductions and exclusions

Several tax deductions, exemptions and credits were extended for tax-year 2014 or were increased in order to adjust for inflation. The following are just some examples of the changes.

Earned Income Tax Credit

Congress retroactively extended the Earned Income Tax Credit in late December to cover the 2014 tax year. The amount of the credit increased in 2014 for working taxpayers with income below certain thresholds. Whether or not you qualify depends on your income and the number of dependents you have in your care. The earned income and adjusted gross income (AGI) threshold amounts for 2014  range from $14,950 for a married individual without children to $52,427 for a married couple with children, and the credit ranges from $496 to $6,143.

Foreign Earned Income Exclusion

If you are a U.S. citizen and you live abroad, you are taxed on the amount of income you earn worldwide. However, you could qualify to exclude a certain amount from your overall income. In 2015, the Foreign Earned Income Exclusion amount was increased to $100,800, but for tax-year 2014, the maximum available exclusion is $99,200.

Alternative Minimum Tax Exemption

The Alternative Minimum Tax (AMT) is an income tax of up to 28% that applies to individuals, corporations, estates and trusts whose earnings are above a certain amount. Taxpayers below certain income thresholds automatically qualify for the AMT exemption.

The AMT exemption allows taxpayers to deduct a specific amount from his or her alternative minimum taxable income before calculating AMT liability. The AMT exemption starts to be phased out once a taxpayer reaches a certain income level. It is reduced by 25% of the amount by which alternative minimum taxable income exceeds $117,300 for single taxpayers (or $156,500 for married couples filing jointly).

In 2012’s American Taxpayer Relief Act, the AMT exemption was permanently amended to adjust with inflation, meaning exemption amounts could change every year.  For 2014, AMT exemption amounts are:

• Single or Head of Household – $52,800
• Married filing jointly – $82,100
• Married filing separately – $41,050

Standard, itemized deduction and personal exemption increases

Personal exemption

The personal exemption amount increased in 2014 to $3,950, a $50 increase over 2013’s limit. That amount is reduced or adjusted if your income falls into any of the below categories:

• For married individuals filing separately, your gross income cannot exceed $152,525
• For single individuals, your income can’t exceed $254,200
• For head-of-household filing status, income can’t exceed $279,650
• For married individuals filing jointly, your income limit is $305,050

Standard deduction

The standard deduction was also increased in 2014 for all taxpayers. For single taxpayers and married individuals filing separately, the deduction increased to $6,200 from $6,100 in 2013. For married individuals filing jointly, the amount increased to $12,400 from $12,200 in 2013. For individuals filing as head of household, the deduction increased in 2014 to $9,100 from $8,950.

The limit on itemized deductions will kick in for individuals with incomes greater than $258,250 (or $309,900 for married couples filing jointly.)

Individuals should plan now to cash in on available tax credits, deductions and exemptions and to be in compliance with ACA and other IRS requirements. Speak to your accounting professional to find out how these and other tax changes could affect your tax filing this year. If you have questions about your tax situation, please contact me or another member of Kaufman Rossin’s tax team.