Because of inflation adjustments in the tax code for 2014, most taxpayers will see modest savings.
Indexing of brackets due to inflation lowers tax bills by keeping more of your income in lower brackets—say in the 15% bracket instead of the 28% bracket. A couple can have up to $73,800 (up from $72,500 this year) and a single up to $36,900 (up... from $36,250) of taxable income in 2014 and still be in the ordinary income tax bracket.
That can help you beat the capital gains tax– to the extent you sell stock at a gain to fill up the 15% bracket, you pay 0% in capital gains tax. Inflation adjustments can also help you snag tax breaks that have income ceilings like education credits and Roth IRAs.
But one group that doesn’t fare so well is high-income taxpayers. The two new Obamacare taxes that went into effect Jan. 1, 2013 are not adjusted for inflation so they stay the same for 2014. The first is the 3.8% surtax on net investment income, triggered when adjusted gross income exceeds $250,000 for a couple or $200,000 for a single. The second is the 0.9% Medicare tax on earned income, which hits when wages or self-employment income reach those levels.
High-income taxpayers are also hit with the phase out of personal exemptions and itemized deductions – CCH projects the phase out will begin at $305,050 for couples and $254,200 for singles in 2014.
The highest-income earners do get a break. The top 39.6% bracket for higher-income taxpayers, new this year, begins at $450,000 for married couples filing jointly (and surviving spouses) and at $400,000 for singles. For 2014, CCH projects the new thresholds at $457,600 for couples and $406,750 for singles.
Another freebie for the well-to-do is the indexing of the gift and estate tax exemption. Set at $5 million for 2011, it’s been steadily rising due to inflation adjustments, and CCH projects it will rise from $5.25 million this year to $5.34 million in 2014. This provides an opportunity for the wealthy who have already made lifetime gifts to their heirs to make additional substantial gifts taxfree.
The amount exempt from the alternative minimum tax for a couple will go from $80,800 to $82,100 and from $51,900 to $52,800 for singles.
The standard deduction is projected to jump by $100 to $6,200 for singles and by $200 to $12,400 for couples.
The personal exemption is projected to go up $50 to $3,950.
What stays the same?
The “kiddie” deduction, used on the returns of children claimed as dependents on their parents’ returns, stays the same at $1,000.
The gift tax exemption, the amount you can give to as many individuals as you’d like without eating into your lifetime gift tax exclusion, stays the same at $14,000.
The limit on how much you can contribute to an Individual Retirement Account stays the same at $5,500.