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IRS Releases 2014 Inflation-Adjusted Amounts and Pension Colas
(Parker Tax Publishing: November 2013)

The IRS released Rev. Proc. 2013-35 and IR-2013-86 (10/31/13), which provide the annual inflation-adjusted amounts and pension cost-of-living adjustments, respectively, for 2014.

Inflation-Adjusted Amounts

The following are some of the more important provisions included in Rev. Proc. 2013-35, relating to the annual inflation-adjusted amounts.

Taxable Income Subject to the Maximum Rates

The tax rate of 39.6 percent affects single individuals whose income exceeds $406,750; taxpayers filing joint returns whose income exceeds $457,600; head of household individuals whose income exceeds $432,200; and married filing separately individuals whose income exceeds $228,800. The other marginal rates 10, 15, 25, 28, 33 and 35 percent and the related income tax thresholds are described in the revenue procedure.

Standard Deduction Amounts

The standard deduction rises to $6,200 (up from $6,100 in 2013) for singles and married persons filing separate returns and $12,400 (up from $12,200 in 2013) for married couples filing jointly. The standard deduction for heads of household rises to $9,100 (up from $8,950 in 2013).

The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,000, or (2) the sum of $350 and the individual's earned income (the same as in 2013).

The additional standard deduction amount for the aged or the blind is $1,200 (the same as in 2013). The additional standard deduction amount is increased to $1,550 (up from $1,500 in 2013) if the individual is also unmarried and not a surviving spouse.

Itemized Deduction Limitation

The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).

Personal Exemption and Phaseout Amounts

The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly).

Alternative Minimum Tax Exemption

The alternative minimum tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).

Earned Income Credit

The maximum earned income credit amount is $6,143 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,044 for tax year 2013. Rev. Proc. 2013-35 has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.

Estate Tax Exclusion

Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from $5,250,000 for estates of decedents who died in 2013.

Limit on Employee Contributions to FSAs

The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.

Small Employer Health Insurance Credit

The small employer health insurance credit provides that the maximum credit is phased out based on the employer's number of full-time equivalent employees in excess of 10 and the employer's average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.

Gift Tax Exclusions

The annual exclusion for gifts is $14,000 (which is the same as in 2013).

The first $145,000 (up from $143,000 in 2013) of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during the year.

Kiddie Tax

The amount used to reduce the net unearned income reported on a child's tax return subject to the kiddie tax, is $1,000 (which is the same as in 2013).

Foreign Earned Income Exclusion Amount

The foreign earned income exclusion amount is $99,200 (up from $97,600 in 2013).

U.S. Savings Bond Interest Exclusion for Higher Education Expenses

The exclusion from income for U.S. savings bond interest for taxpayers who pay qualified higher education expenses, begins to phase out for modified adjusted gross income above $113,950 for joint returns (up from $112,050 in 2013) and $76,000 (up from $74,700 in 2013) for other returns. The exclusion is completely phased out for modified adjusted gross income of $143,950 (up from $142,050 in 2013) for joint returns and $91,000 (up from $89,700 in 2013) for other returns.

Medical Savings Accounts

For purposes of medical savings accounts, a "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,200 (up from $2,150 in 2013) and not more than $3,250 (up from $3,200 in 2013), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,350 (up from $4,300 in 2013). For tax years beginning in 2014, the term "high deductible health plan" means, for family coverage, a health plan that has an annual deductible that is not less than $4,350 (up from $4,300 in 2013) and not more than $6,550 (up from $6,450 in 2013), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,000 (up from $7,850 in 2013).

Long-Term Care Premiums

The limitations for eligible long-term care premiums includible in the term "medical care" are: for individuals with an attained age of 40 or less before the close of the tax year, $370 (up from $360 in 2013); more than 40 but not more than 50, $700 (up from $680 in 2013); more than 50 but not more than 60, $1,400 (up from $1,360 in 2013); more than 60 but not more than 70, $3,720 (up from $3,640 in 2013); and more than 70, $4,660 (up from $4,550 in 2013).

Attorney Fee Award Limitation

The attorney fee award limitation is $190 per hour (up from $180 in 2013).

Child Adoptions

The credit allowed for an adoption of a child with special needs is $13,190 (up from $12,970 in 2013). The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,190 (up from $12,970 in 2013). The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $197,880 (up from $194,580 in 2013) and is completely phased out for taxpayers with modified adjusted gross income of $237,880 (up from $234,580 in 2013) or more.

Hope Scholarship Credit/Lifetime Learning Credit

The Hope Scholarship Credit is an amount equal to 100 percent of qualified tuition and related expenses not in excess of $2,000 plus 25 percent of those expenses in excess of $2,000, but not in excess of $4,000 (the same as for 2013). Accordingly, the maximum Hope Scholarship Credit is $2,500 (the same as for 2013). A taxpayer's modified adjusted gross income in excess of $80,000 ($160,000 for a joint return) (the same as for 2013) is used to determine the reduction in the amount of the Hope Scholarship Credit otherwise allowable. A taxpayer's modified adjusted gross income in excess of $54,000 ($108,000 for a joint return) (up from $53,000 and $107,000, respectively, in 2013) is used to determine the reduction in the amount of the Lifetime Learning Credit otherwise allowable.

Qualified Transportation Fringe Benefit

For taxable years beginning in 2014, the monthly limitation regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $130 (down from $245 in 2013). The monthly limitation for the fringe benefit exclusion amount for qualified parking is $250 (up from $245 in 2013).

Pension Colas

The following are some of the more important provisions included in IR-2013-86 (10/31/13) relating to pension-related cost-of-living adjustments.

Elective Deferrals

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $17,500.

Catch-up Contributions

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $5,500. The dollar limitation under Code Sec. 414(v)(2)(B)(ii) for catch-up to a SIMPLE 401(k) plan described in Code Sec. 401(k)(11) or a SIMPLE IRA described in Code Sec. 408(p) for individuals aged 50 or over remains unchanged at $2,500.

IRA Contributions

The limit on annual contributions to an individual retirement arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

IRA Phaseout Amounts

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000 (up from $59,000 and $69,000 in 2013).

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $181,000 and $191,000 (up from $178,000 and $188,000 in 2013).

For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA AGI Phaseout Amounts

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly (up from $178,000 to $188,000 in 2013). For singles and heads of household, the income phase-out range is $114,000 to $129,000 (up from $112,000 to $127,000 in 2013). For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver's Credit AGI Limits

The AGI limitation under Code Sec. 25B(b)(1)(A) (i.e., relating to the 50 percent applicable percentage) for determining the saver's credit (also known as the retirement savings contribution credit) for married taxpayers filing a joint return is increased to $36,000 from $35,500 in 2013; the limitation under Code Sec. 25B(b)(1)(B) (i.e., relating to the 20 percent applicable percentage) is increased to $39,000 from $38,500; and the limitation under Code Sec. 25B(b)(1)(C) (relating to the 10 percent applicable limitation) and Code Sec. 25B(b)(1)(D) (relating to the zero percent applicable limitation) is increased to $60,000 from $59,000.

The AGI limitation under Code Sec. 25B(b)(1)(A) for determining the saver's credit for taxpayers filing as head of household is increased to $27,000 from $26,625; the limitation under Code Sec. 25B(b)(1)(B) is increased to $29,250 from $28,875; and the limitation under Code Secs. 25B(b)(1)(C) and 25B(b)(1)(D) is increased to $45,000 from $44,250.

The AGI limitation under Code Sec. 25B(b)(1)(A) for determining the saver's credit for all other taxpayers is increased to $18,000 from $17,750; the limitation under Code Sec. 25B(b)(1)(B) is increased to $19,500 from $19,250; and the limitation under Code Secs. 25B(b)(1)(C) and 25B(b)(1)(D) is increased to $30,000 from $29,500.

Limitation on the Annual Benefit under a Defined Benefit Plan

The limitation on the annual benefit under a defined benefit plan under Code Sec. 415(b)(1)(A) is increased from $205,000 to $210,000. For a participant who separated from service before January 1, 2014, the limitation for defined benefit plans under Code Sec. 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2013, by 1.0155.

Limitation for Defined Contribution Plans

The limitation for defined contribution plans under Code Sec. 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.

Annual Compensation Limitation

The annual compensation limit under Code Secs. 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 in 2013 to $260,000.

Dollar Limitation for Key Employees in a Top-Heavy Plan

The dollar limitation under Code Sec. 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $165,000 to $170,000.

Limitation for Definition of Highly Compensated Employees

The limitation used in the definition of highly compensated employee under Code Sec. 414(q)(1)(B) remains unchanged at $115,000.

SEPs and SIMPLEs

The compensation amount under Code Sec. 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.

The salary reduction contribution limit under Code Sec. 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,000.

Compensation Amounts for Control Employees

The compensation amount under Reg. Sec. 1.61-21(f)(5)(i) concerning the definition of control employee for fringe benefit valuation purposes is increased from $100,000 to $105,000. The compensation amount under Reg. Sec. 1.61-21(f)(5)(iii) is increased from $205,000 to $210,000. (Parker Tax Publishing Staff Writers)

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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