As IRS commissioner John Koskinen has publicly admitted, the 2014 tax year will be one of the most complicated and stressful to process in the history of the IRS. Last-minute changes to tax credits and deductions, new tax rules relating to the Patient Protection and Affordable Care Act, and a reduced IRS budget will create a perfect storm for a hot mess come January. Processing delays—even disappearing returns, according to National Taxpayer Advocate Nina Olson—can be expected.
To help you get a handle on the critical tax facts, let's take a look at some of the changes that could affect your small-business tax filing.
New Income Tax Brackets
There are now seven income tax brackets. The brackets will also break down differently depending on your filing status.
Capital Gains Taxes Expand
Capital gains is the profits you earn from the sale of your capital assets, such as investments or property. Gains on investments held for less than one year are considered short-term gains and are lumped together with your ordinary income. Gains on investments held for more than one year receive special tax treatment. For 2015, the tax rate applied to long-term capital gains will depend on the tax bracket you fall into:
- Tax returns in the 10 and 15 percent tax brackets won't pay any capital gains taxes.
- Tax returns in the 25, 28, 33 and 35 percent tax brackets will pay 15 percent in capital gains taxes.
- Tax returns in the 39.6 percent tax bracket will pay 20 percent in capital gains taxes.
There are also several other important capital gains tax provisions to note:
- Ordinary dividends will be lumped together and taxed with ordinary income.
- Qualified dividends will be taxed at the long-term capital gains tax-rate of the taxpayer.
- The new Net Investment income tax is 3.8 percent on all investments income including capital gains. It's only triggered on tax returns that report a modified adjusted gross income of $250,000 (if married and filing jointly), $125,000 (if married and filing separately) and $200,000 (if filing as single or head of household).
Payroll Taxes Increasing
Payroll (FICA) taxes consist of the Social Security tax, the Medicare tax and the new additional Medicare tax for higher-income earners. Here's what you need to know about the payroll tax:
- Social Security tax: 12.4 percent of earnings on income up to $118,500
- Medicare tax: 2.9 percent on all earnings
- Additional Medicare tax: 0.9 percent on all income above $250,000 (if married and filing jointly), $125,000 (if married and filing separately) and $200,000 (if filing as single or head of household).
Changes to Retirement Account Contributions
Contributions to retirement accounts are changing for 2015, and in some cases, you can put away a great deal more than you could last year.
- SEP-IRA and solo 401(k). The maximum contribution increases to $53,000 for both types of accounts commonly used by small-business owners.
- SIMPLE IRA. The contribution limit increases to $12,500. Anyone age 50 or older on December 31, 2015, may contribute an additional $3,000 in “catch up” contributions.
- 401(k). Employees may contribute up to $18,000. Anyone age 50 or older on Dec. 31, 2015, may contribute an additional $6,000 in “catch up” contributions.
- IRA. The contribution limit stays at $5,500 with an additional $1,000 for “catch up” contributions.
Bitcoin Payments Are Now Taxable Income
The IRS isn't wasting any time in dealing with virtual currencies. Even though virtual currencies aren't considered “legal tender” for tax year 2014, the IRS has indicated that taxpayers should treat them as property with tangible value. This means that income taxes, payroll taxes and capital gains taxes are all applicable to virtual currency.
Tax Extenders May Expire
The American Taxpayer Relief Act of 2012 (ATRA) included 55 tax deductions, credits and other benefits that unfortunately expire on Dec. 31, 2014. Fourteen of these apply to small businesses, and 12 are for consumers. In order to extend these credits, Congress must pass a law and the president must not veto it. So far, only the House of Representatives has passed a bill to extend the ATRA benefits. The Senate and the president disagree with a short-term approach to this issue, but the Senate has scheduled a vote without changes to the House version. If this bill doesn't pass before Dec. 31, then they all expire. If Congress passes the law next year and applies it retroactively, that would just add to an already complicated tax year.
IRAs Limited to One Rollover Per Person Per Year
Even though this won’t impact your 2014 returns, you need to keep it mind. Up until now, the IRS had allowed owners of IRA accounts to transfer the balances from one account to another account (called a “rollover”) once every 12 months without paying any interest or penalties on as many accounts as they have. A recent tax court decision changes that.
Starting in 2015, each person will be allowed to perform only one rollover every 12 months regardless of how many IRAs they have. This includes the SEP and SIMPLE IRAs popular among small-business owners. Any additional rollovers will subject the account to taxes and penalties. The only exemptions are conversion rollovers from traditional to Roth IRAs and trustee-to-trustee transfers where the account stays intact.
What’s Not Changing: Tax Refund Timetables
Across social media websites, there's been a tremendous buzz regarding a “new IRS directive” that states that all tax refunds due to consumers won't be paid until October 2015 regardless of when they file their return. The source of the news is a satirical website, which did an all-too-realistic article on this supposed change. It’s a hoax.
While you can’t avoid sending your tax returns to the IRS, you can minimize the chances of delay by filling your returns correctly. Whether you self-prepare or pay a professional preparer to help you, make sure these changes are taken into account.
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The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any tax strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL TAX ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
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