IRS Updates Key Tax Numbers For 2014

The IRS released its 2014 inflation adjustments yesterday. Some key takeaways:

· All tax brackets increased by ~1.7%, meaning that you’ll pay slightly less tax given the same amount of taxable income in 2014.

· The maximum allowed employee contribution to a 401k remains the same at $17,500 (+$5500 if over age 50)

· The total contribution to a 401k plan (employee + employer combined) increases from $51k to $52k.

· The maximum income allowed to be considered for defined contributions plan matches, profit sharing, etc. increased from $250k to $260k.

· The Standard Deduction amounts increased slightly to $6200 single (S), $12,400 married filing jointly (MFJ)

· The Personal Exemption increased to $3950 per family member from $3900.

· The Social Security Wage Base increased to $117,000 (this is the amount of your income that is subject to the 6.2% employer and employee social security tax).

· The Annual Gift Tax limit stayed the same at $14,000.

· The Lifetime Gift/Estate Tax Exemption increased to $5,340,000.

· The maximum allowed contribution to a Health Savings Account (HSA) increased to $3300 for single coverage, $6550 for more than one covered person.

· The Traditional IRA / Roth IRA contribution limits remained the same at $5500 (+$1000 additional if over age 50)

· The Roth IRA contribution income limits increased. The $5500 contribution begins to phase out at $114k and is eliminated completely at $129k of AGI for singles. It’s $181k and 191k for joint filers. Note, there still are no income limits on converting to a Roth IRA from a Traditional IRA.

· Itemized Deductions and Personal Exemptions begin to be limited if AGI exceeds $254,200 for singles and $305,050 for joint filers. Personal exemptions are reduced by 2% for every $2500 of AGI over that threshold. Itemized deductions are reduced by 3% of the amount that AGI is over that threshold.

· The income limits for being able to deduct up to $2500 of student loan interest start at $65k S and $130k MFJ. The deduction is completely phased out at $80k S and $160k MFJ.

· 2014 IRS Mileage Rate updates have not yet been released.

As always, you can find all tax brackets and key tax numbers listed on the Resources section of the PWA Website.

New Rule For Healthcare Flexible Spending Accounts

The IRS announced yesterday that it is relaxing the rules around the use-it-or-lose-it “feature” of healthcare flexible spending accounts (FSAs). Plan sponsors will now be able to all plan members to rollover up to $500 of unspent FSA dollars into the following year’s FSA. Currently, any money not used during the plan year would be forfeited, though most plans do have a grace period that allows until 3/15 of the following year to zero out balances before forfeiture. Starting with the 2013 calendar year, plan sponsors can now choose whether to:

  1. Implement the new $500 rollover rule OR
  2. Maintain the grace period rule that extends the deadline for using a year’s FSA funds until 3/15 of the following year OR
  3. Neither

It is up to the employer (plan sponsor) to set the rules for the given plan. Since 2013 is almost over and most plans already allow the grace period rule, I suspect few plans will be changed for the 2013 plan year to allow the new rule. It is possible that plans may be updated to the new $500 rollover rule for 2014. If you’re going through your Annual Benefits Enrollment, plan to use a healthcare FSA, and have not received any direction form your employer as to whether or not they plan to implement the new rule, please contact your HR representative and ask.

Full text for the rule change can be found in Notice 2013 -71 on the IRS Website.