Today, we examine some of the new IRS guidelines for 2014.
by Jay Peroni, CFP® – FTMDaily Contributing Writer
As we move closer to the end of 2013, now is a good time to start looking ahead to IRS changes for 2014. Let’s examine a few of these important 2014 tax changes.
Social Security Changes
In 2014, the average monthly Social Security payment will increase by $19 due to an increase for cost of living. The 1.5% cost-of-living (COLA) adjustment for 2014 is one of the smallest increases ever. In fact, since 1975 there have only been seven increases less than 2%. It’s no surprise that four of these have occurred in the past five years with last year’s COLA increase coming in at just 1.7%. This year the increase is even smaller.
Because the COLA increase is tied to the Federal government’s Consumer Price Index (CPI), benefit increases are low when the government’s official numbers are low. The Feds looked at CPI figures from July to September of 2013 in order to determine the 2014 numbers. Because these numbers currently look tame, 2014’s increase was abnormally low.
Though the government’s inflation numbers may appear subdued, it makes more sense to look at the group receiving the income payments. Senior Citizens League recently estimated Social Security recipients have lost 34% of their purchasing power since 2000. Most of this loss has occurred due to rising health care expenses, for which the CPI has not properly adjusted.
The CPI measures over 200 item categories ranging from changes in the costs of rents, transportation, tuition, clothing, and food, as well as changes in prescription drug and medical care costs. The biggest challenge facing seniors is the pace of change, especially for medical costs, which have rapidly been outpacing inflation.
Because seniors spend more on health care than the general population, this increase has a much greater impact for seniors. Moreover, the 2.4% increase in health care costs from September 2012 to September 2013 was 62.5% higher than the 2014 COLA increase in Social Security benefits. As medical costs continue to soar, COLA will fail to keep up with these increases, leaving fewer dollars for seniors to spend. That is why it is absolutely vital to have multiple income sources in retirement.
- In 2014, the maximum monthly Social Security benefit limit will increase to $2,642, up from the current cap of $2,533.
- The Social Security annual earnings limit will increase in 2014. For people attaining normal retirement age after 2014, the annual exempt amount in 2014 is $15,480. For those reaching normal retirement age in 2014, the annual exempt amount is $41,400.
- The wage base for Social Security taxes is also rising for those on the job. American workers will pay a 6.2% payroll tax on the initial $114,000 of their incomes in 2014. It is estimated that 6% of working Americans will pay higher Social Security taxes next year.
In addition to the tax changes in Social Security, the IRS has also made some minor changes to Retirement Plan limitations for 2014.
The 2014 contribution limit for a Traditional IRA will remain at $5,500, with an additional $1,000 catch-up contribution allowed for those ages 50 and older.
However, the Adjusted Gross Income (AGI) phase-out ranges will slightly increase. If you fall into one of these phase-out categories, you will only be able to take a partial tax deduction on your Traditional IRA contribution (but you can still contribute the full amount).
- Single and head-of-household tax filers covered by a workplace retirement plan: Phase-out is between $60,001 and $70,000.
- Married filing jointly, covered by a workplace retirement plan: Phase-out is between $96,001 and $116,000.
- Married filing jointly, spouse covered by a workplace retirement plan and you aren’t: Phase-out is between $181,001 and $191,000.
The 2014 contribution limit for a Roth IRA will remain at $5,500, with an additional $1,000 catch-up contribution allowed for those 50 and older.
However, the Adjusted Gross Income (AGI) reduced-contribution ranges will slightly increase.
- Single and head-of-household tax filers: Phase-out is between $114,000 and $129,000.
- Married filing jointly: Phase-out is between $181,000 and $191,000.
401(k)s, 403(b)s, 457 Plans, Federal Thrift Savings Plans
Contribution limits on these plans will remain the same for 2014 allowing those under age 50 to contribute up to $17,500 annually. Those over age 50 can contribute $23,000 annually.
SEP and SIMPLE IRAs
In 2014, the maximum allowable compensation for SEP IRA contributions increases to $260,000. The threshold for an employee to be included in a SEP plan remains the same at $550 for 2014. The maximum SIMPLE IRA contribution remains at $12,000 for those less than 50 years of age, while those over 50 can contribute $14,500 in 2014.
The 2014 deferral limit is $17,500 for those under 50 and $20,000 for those 50 and above. The compensation limitation increases to $260,000, while the maximum contribution amount across multiple plans will be the lesser of 100% of your compensation, $52,000 for those under 50, or $57,500 for those above age 50.
In 2014, the maximum account balance in an ESOP subject to a 5-year distribution period increases to $1,050,000. The dollar amount used to determine the lengthening of the 5-year distribution period also increases in 2014 to $210,000.
The dollar limitation used to define a key employee in a top-heavy plan increases in 2014 to $170,000.
Income limits for the saver’s credit. This federal tax credit is offered to low and middle-income workers who are saving for retirement. In 2014, you will be eligible for the credit if your adjusted gross income is below these thresholds:
- Married filing jointly: $60,000
- Head of household: $45,000
- Married filing separately & single filers: $30,000
Bottom Line: Keep these 2014 tax plan adjustments in mind as you think about your financial moves for next year. Now is a great time for a year-end financial check up. In 2013 you may have changed jobs, made major purchases, welcomed a new child, retired, bought or sold a residence, decided upon new goals or maybe something else. So now is a great time to reexamine your financial objectives. Also, it makes sense to measure your financial progress. If you are not making progress in your goals or failing to get a decent return, or you are assuming too much risk in your current portfolio, now is a good time for a change. Schedule your free strategy meeting today!
Disclaimer: Investing involves risk. Always do your own due diligence and consult a trusted financial professional before making any investing or financial decisions. Jay Peroni is a Certified Financial Planner and is part of our Christian Financial Advisor Network.
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