The Complete Cheat Sheet to Tax Changes for 2014

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Source: http://www.flickr.com/photos/teegardin/

Source: http://www.flickr.com/photos/teegardin/

It seems fair to classify the U.S. tax code as an abomination created by Congress and handled by the Internal Revenue Service. Americans spend six billion hours each year — nearly 25 hours for each adult, or 3 million people working full-time for the year — dealing with it, most of it undoubtedly spent either in a blind rage or soul-crushing melancholy. This isn’t even the worst news.

The worst news is that it’s, well, getting worse. The U.S. tax code is already 4 million words long (this would fill nearly 74 thousand standard-sized sheets of paper) and it’s getting longer pretty much every day. In 2012, the National Taxpayer Advocate reported that there had been approximately 4,680 changes to the tax code in the past 11 years, more than one per day.

This has made it pretty much impossible for policymakers and tax professionals — let alone the average citizen — to stay abreast of the current tax environment. Nearly 60 percent of Americans pay a professional to prepare their taxes for them, making the complexity of the tax code another kind of tax in and of itself. The National Taxpayer Advocate argues that the most serious problem facing taxpayers is the complexity of the tax code.

The good news is that most people don’t need to worry about most parts of the tax code. Here’s a guide to some of the major changes (and non-changes) for 2014 that will impact almost every filer.

Income tax brackets

There’s a certain alchemy to taxes, but really, the biggest hit that most individuals receive is from the personal income tax. This is also where the government makes most of its money, collecting about 60 percent of total revenue from the personal income tax. Since it’s probably your biggest tax liability, it’s worth knowing which tax bracket you fall into. Remember that 2013 saw the addition of a new top tax bracket, which is sticking around for the foreseeable future.

Income tax brackets have once again changed — and, for the most part, for the better. The caps for each bracket have been raised so it’s possible, if your income doesn’t increase significantly, that when you file your fiscal 2014 taxes, you’ll fall into a lower bracket than when you filed in 2013.

Tax Bracket Single Married Filing Jointly Head of Household Married Filing Separately
10% $0 to $9,075 $0 to $18,150 $0 to $12,950 $0 to $9,075
15% $9,076 to $36,900 $18,151 to $73,800 $12,951 to $49,400 $9,076 to $36,900
25% $36,901 to $89,350 $73,801 to $148,850 $49,401 to $127,550 $36,901 to $74,425
28% $89,351 to $186,350 $148,851 to $226,850 $127,551 to $206,600 $74,426 to $113,425
33% $186,351 to $405,100 $226,851 to $405,100 $206,601 to $405,100 $113,426 to $202,550
35% $405,101 to $406,750 $405,101 to $$457,600 $405,101 to $432,200 $202,551 to $228,800
39.6% $406,751 or more $457,601 or more $432,201or more $228,801 or more

Personal exemptions, standard deductions, and itemized deductions

The tax code may be packed full of unfair exemptions and loopholes for certain businesses and the super wealthy, but the average Joe has at least one thing going for him: the personal exemption. The personal exemption acts like a tax deduction, meaning it reduces your total taxable income. It is regularly adjusted upwards, and 2014 is no exception. The personal exemption increased by $50, from $3,900 in 2013 to $3,950 in 2014.

Remember that the personal exemption now has a phase out (and also remember that you can’t file for a personal exemption if someone claims you as a dependent.) Your personal exemption will be reduced by 2 percent of the amount of income you earn that exceeds the amount listed here:

  • $250,200 for single taxpayers
  • $305,050 for married taxpayers filing jointly
  • $279,650 for taxpayers filing as head of household
  • $152,525 for married taxpayers filing separately

Itemized deductions are also subject to a phaseout rule similar to the personal exemption phaseout rule, except the reduction is 3 percent of the amount of income you earn that exceeds the threshold (same as above), or 80 percent, whichever is lower. However, there are three big exceptions to be aware of: deductions claimed for medical expenses, investment interest, or for casualty or theft losses are unaffected.

The 2014 standard deduction amounts are listed below.

  • Single: $6,200
  • Head of Household: $9,100
  • Married Filing Jointly: $12,400
  • Married Filing Separately: $6,200
  • Qualifying Widow/Widower: $12,400

For dependents, the standard deduction is a little more complicated. Dependents can deduct whichever is greater: $1,000, or earned income plus $350, but not in excess of $6,200 (the standard deduction for a single filer).

Those who are aged 65 years or older and those who are legally blind can increase their standard deduction by $1,550 if they are filing as a single or as a head of household, and by $1,200 if they are married filing jointly, separately, or a qualifying widow.

Retirement account contribution limits

Not a lot about retirement account contribution limits has changed between 2013 and 2014 (knock on wood), but it’s these limits are some of the most important pieces of tax-related information you can know. For the record, contribution limits are indexed to inflation, but, as the IRS put it, “Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment.”

The contribution limit for Roth and traditional IRAs is unchanged at $5,500, with a catch-up contribution allowance of $1,000 for those aged 50 or more. The contribution limit 401(k)s is also unchanged at $17,500, with a catch-up contribution allowance of $5,500 for those aged 50 or more.

Remember, if your employer sponsors a retirement plan, then the deductions you can claim for contributions to a traditional IRA begin to phase out at a certain income level (the IRS can tell you exactly what the phaseout range is.) Contributions to a Roth IRA also phase out at certain income levels, regardless of workplace plans.

Finally, the income limit for the saver’s credit was bumped up to $60,000 for married couples filing jointly, $45,000 for heads of households, and $30,000 for married people filing separately or single filers.

Alternative minimum tax

Think you can deduct your way to a tax-free 2014? Well, think again. The introduction of the alternative minimum tax made it (theoretically) impossible for wealthier Americans to game the tax system and totally eliminate their tax liability through the abuse of deductions. To make a long story short, if you earn less than the following amounts by filing status, you don’t need to worry.

  • $52,800 for single taxpayers
  • $82,100 for married taxpayers filing jointly
  • $41,050 for married taxpayers filing separately

If you earn more than this, or if you’ve claimed any of about two-dozen specific deductions (find out which ones at the IRS website), you need to fill out the dreaded form 6251. This form calculates income tax differently than normal, primarily through the exclusion of certain deductions. If you end up owing more in income tax through form 6251 than you do through the normal calculation, then you must pay the difference as an additional tax.

Those of you who are married with children should definitely make sure to check whether or not the AMT applies to you. The AMT does not allow for personal exemptions, meaning you can’t deduct your children (or yourselves.)

If you itemize your deductions, those of you with a large medical bill should be aware that if you want to claim a medical expense deduction, it has to exceed an additional 2.5 percent of your adjusted gross income under the AMT. Normally, you can only deduct the part of your medical and dental expenses that exceed 10 percent of your adjusted gross income.

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