Last month, the Internal Revenue Service announced the annual inflation adjustments for 2014, which impact tax rates as well as certain deductions and credits. The new numbers won’t actually affect your tax filing until 2015 but knowing what you can expect can help you adjust your tax planning strategy accordingly. Here’s a look at some of the most significant adjustments the IRS has made for the upcoming tax year.
One of the biggest changes set to impact taxpayers has to do with individual tax rates. The income threshold limits have increased, which could potentially bump certain taxpayers into a lower tax bracket. For 2014, the 39.6 percent tax rate applies to single filers making more than $406,750 and married couples filing jointly with an income of $457,600 or more. For 2013, the limits were $400,000 and $450,000 respectively. Taxpayers who claim head of household will be subject to the highest tax bracket only if they make more than $432,200, compared to $425,000 for 2013. Income limits for the other marginal tax rates — 10, 15, 25, 28, 33 and 35 — were also adjusted accordingly.
The IRS also increased the standard deduction rate to $6,200 for single taxpayers and married taxpayers filing separately. The standard deduction increases to $12,400 for married couples filing jointly and $9,100 for heads of household. The new numbers represent only a minor bump over the deduction limits for 2013.
For 2014, the limitation for itemized deductions will start at $254,200 for single filers and $305,050 for married couples filing jointly. That’s up slightly from the 2013 limits of $250,000 and $300,000. As in 2013, the amount of itemized deductions you can claim is reduced by 3 percent of the amount by which your adjusted gross income exceeds the threshold limits. The new limitation limits don’t impact itemized deductions for medical expenses, gambling losses, investment interest expense and casualty/theft losses.
The personal exemption amount for 2014 is $3,950, up slightly from the 2013 amount of $3,900. The phase-out limits for claiming personal exemptions begins at $254,200 for single filers and $305,050 for married couples filing jointly. Personal exemptions phase out completely for single taxpayers making $376,700 and married couples filing jointly who earn more than $427,550.
Alternative Minimum Tax (AMT) Exemptions
Under the American Taxpayer Relief Act of 2012, the Alternative Minimum Tax has been permanently adjusted for inflation and the IRS has upped exemption amounts for 2014 accordingly. Starting next year, the exemption amounts will be $52,800 for individuals and $82,100 for married couples filing jointly. The exemption limits were $51,900 and $80,800 in 2013.
Tax Credit Adjustments
Several key tax credits were also adjusted for 2014. Starting next year, the maximum Earned Income Credit amounts will be $3,304 for taxpayers filing jointly with one child; $5,460 for couples with two children; $6,143 if you have three or more children and $496 for couples with no children. The amount of the Child Tax Credit will remain the same but the value used to determine how much of the credit may be refundable is capped at $3,000. The threshold limit for the Kiddie Tax will stay the same at $1,000 and the adoption credit will go up to $13,190. The phase out limits for the adoption credit, which was made permanent earlier this year, start at $197,880. The credit is not refundable.
These are just a few of the more than 40 tax adjustments the IRS announced for 2014. For more detailed information about what you can expect, take a look at the complete list of adjustments here.