A number of tax changes are taking effect in 2014. They are the result of tax legislation enacted in prior years or are triggered by effective dates in IRS regulations, rulings and other guidance. Also, a number of important final regs go into effect this year.
Here are highlights of these tax changes affecting businesses and individuals:
Individuals not carrying health insurance face a penalty. For tax years beginning after Dec. 31, 2013, nonexempt U.S. citizens and legal residents must pay a penalty (really a tax as defined by the Supreme Court) if they do not maintain minimum essential coverage, which includes government-sponsored programs (e.g., Medicare, Medicaid, Children’s Health Insurance Program), eligible employer-sponsored plans, plans in the individual market, certain grandfathered group health plans and other coverage as recognized by HHS in coordination with IRS. There are a number of exceptions, such as one for certain lower-income individuals. Also, individuals who received a notice saying that their current health insurance plan is being cancelled also may qualify for an exemption.
Refundable tax credit for low- or moderate-income families buying certain health insurance. A new refundable tax credit (the “premium assistance credit”) applies to qualifying taxpayers who get health insurance coverage by enrolling in a qualified health plan through an exchange.
“Qualified health plans” may be offered through cafeteria plans by “qualified employers.” A reimbursement (or direct payment) for the premiums under any “qualified health plan” through a health insurance exchange is a qualified benefit under a cafeteria plan if the employer is a qualified employer (generally, smaller businesses). In very broad terms, a qualified health plan is one that meets certain certification requirements, provides “an essential health benefits package,” and is offered by an insurer meeting detailed requirements.
Lower standard mileage allowance rate. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) decreases by 0.5 cents to 56 cents per mile for business travel. This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense also decreases by 0.5 cents to 23.5 cents per mile.
A 3.8 percent surtax on investment income and gains goes into effect. For tax years beginning after Dec. 31, 2012, certain unearned income of individuals, trusts, and estates is subject to a surtax (i.e., it’s payable on top of any other tax payable on that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax” (NIIT), is 3.8 percent of the lesser of (1) “net investment income” (NII) or (2) the excess of modified adjusted gross income (MAGI) over the unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). In November 2013, IRS issued final regs that provide guidance on the 3.8 percent surtax. The final regs are generally effective for tax years beginning after Dec. 31, 2013, but taxpayers may apply many of the provisions of the final regs to tax years beginning after Dec. 31, 2012.
Allowing agents to handle FUTA for home care service employers. In December, IRS issued final regs that allow a home care service recipient to designate an agent, to report, file, and pay all employment taxes, including those due under the Federal Unemployment Tax Act. The regs also allow an intermediary to file a single FUTA return on behalf of multiple home care service recipients. The regs apply to wages paid on or after Jan. 1, 2014, but can be relied on for all tax years for which a valid designation is in effect.
Revised rules for tips and service charges go into effect. In 2012, IRS issued updated guidance on how employers differentiate between tips that are subject to special FICA tax rules, and service charges (mandatory add-ons to food and drink bills that are distributed by the employer to wait staff), which must be treated as wages and not as tips. Although the guidance generally was effective immediately and applicable retroactively, it was to have applied prospectively by auditors, i.e., only to amounts paid on or after Jan. 1, 2013, if certain conditions were satisfied. At the end of 2012, IRS announced that it was extending to on or after Jan. 1, 2014, the time for businesses to comply with the proper treatment of service charges.
Increased fees apply. Under final regs issued in December 2013, the fee for entering into a regular installment agreement on or after Jan. 1, 2014, is increased from $105 to $120. Also effective Jan. 1, 2014, the fee for processing an offer in compromise (OIC) increases from $150 to $186. However, low-income taxpayers and taxpayers making offers based solely on doubt as to liability will continue to pay no fee.
Kenneth R. Diel is managing member of Diel & Forguson LLC.