Each new year brings tricky changes in the tax code, creating confusion when it comes time to fill out tax forms and do tax planning. Last year's soaring stock prices and rising real estate values could further complicate these tasks as many taxpayers deal with the effects of outsized capital gains.
Seven questions that taxpayers are asking about 2013 and 2014 taxes…
Am I going to have to pay a tax penalty under the Affordable Care Act if I don't have health insurance? I don't see anything about that on the tax forms.
You don't have to pay a penalty on your 2013 taxes, but if you haven't obtained health insurance or enrolled in Medicare by March 31, 2014, you likely will face a penalty on your 2014 taxes. Although the mandate for employers with more than 50 full-time employees to offer coverage was delayed until 2015, the requirement for individuals has not been postponed despite problems with the rollout of Obamacare.
Meanwhile, taxpayers who do sign up for coverage through an Obamacare marketplace might qualify for tax credits to help them pay for coverage starting in 2014. Visit Healthcare.gov to see whether you qualify. These credits typically will be paid by the government directly to the health insurance provider, but if your income doesn't match the income estimate you provide when signing up for coverage, you might owe additional taxes or receive an additional credit when you file your 2014 taxes.
Has anything changed about the taxation of my retirement accounts?
Not on your 2013 return, but there is one notable change coming for the 2014 tax year. Starting in 2014, distributions made directly from a tax-deferred IRA to a charity no longer will be income tax-free unless legislators step in at the last minute to restore this rule. In the past, some IRA owners used this charity option to satisfy required minimum distribution (RMD) rules without incurring income taxes.
I have a home office , and I heard something about a new option for tax deductions called "safe harbor." Is it a good option?
The IRS is offering taxpayers who have tax-deductible home offices the option of simply deducting $5 per square foot of home office space up to 300 square feet, rather than completing Form 8829, Expenses for Business Use of Your Home. This deduction would be reported on line 30 of Schedule C (Form 1040). You still can use Form 8829 to calculate your home-office deduction if you prefer.
It's worth calculating your deduction both ways to see which results in a larger tax savings. Or just compare the $5-per-square-foot deduction to the amount you deducted on last year's Form 8829. Assuming that your mortgage, insurance rates, utility bills and other home-office expenses didn't change much from 2012 to 2013, that should give you a pretty good idea of which option is preferable for you.
I heard that the IRS changed the rules for Flexible Spending Accounts (FSAs) and that I now won't lose money that was remaining in my account at the end of last year. Is that true?
The IRS now lets employers offer employees the option to carry over a balance of as much as $500 from one year to the next—but this provision is not automatic. You can take advantage of this provision only if your employer has already amended its plan documents to allow it. And there's still a chance that money remaining in your FSA from 2013 might not be lost even if your plan does not offer the carryover option. FSAs are allowed to have grace periods of up to two and a half months for all of your FSA balance, so leftover 2013 FSA funds could be accessible as late as March 15, 2014.
Caution: Employers can't offer both the $500 carryover and the two-and-a-half-month grace period—check to see which one, if either, your employer offers.
I finally sold a house in 2013 that I had been renting out for a few years while I waited for home prices to rebound. Do I have to pay capital gains tax on the sale?
Home prices have rebounded recently, so many people who had put off selling houses after the real estate bubble burst finally unloaded them in 2013. Trouble is, not all of those people had been living in those homes recently. Some who were forced to relocate for career reasons or to enter a nursing home were instead renting out their former homes or letting them stand vacant while waiting for the real estate market to recover. The tax code exemption that allows home sellers to avoid paying capital gains taxes on the first $250,000 in profits from the sale of a home ($500,000 if married and filing jointly) applies only to principal residences. To take advantage, you must have used the home as your primary residence for at least two years during the five years preceding the sale. These two years do not need to be consecutive, and you can claim the capital gains tax exclusion from the sale of a home no more than once every two years. (The two-year requirement is reduced to one year for people who move into nursing homes, and these people are allowed to consider the house their primary residence even when they are living in the nursing home.)
You might qualify for a partial exclusion of capital gains even if you didn't live in the home for two of the past five years if the sale of the home was due to a change in job location, a health issue, a divorce or certain other reasons. For details, see IRS Publication 523, Selling Your Home.
My stocks did very well in 2013. Will I have to pay a big capital gains tax bill?
That depends on whether you sold your investment, whether you own shares in individual stocks or mutual funds and, thanks to new tax rules, how high your income was last year.
Capital gains on individual stocks are taxed in the year in which the appreciated investments are sold, not necessarily in the year in which the gains occur. If you held on to most of your shares, you shouldn't face a big capital gains tax bill on your 2013 taxes no matter how well those investments did.
However, mutual fund investors sometimes face big capital gains tax bills even when they don't sell their mutual fund shares. This happens if the fund managers sold shares of highly appreciated securities from the funds' underlying holdings, as was often the case in 2013.
Tax preparers are hearing lots of questions about capital gains this year, in part because it's been a while since stocks appreciated as strongly as they did in 2013, but also in part because new tax rules have increased capital gains taxes for high earners.
If your modified adjusted gross income (MAGI) is more than $200,000 ($250,000 if married and filing jointly), you now may face an additional 3.8% Medicare surtax on a portion of your investment income (including long-term capital gains and dividends after subtracting investment expenses). Go to IRS.gov, and search for "NIIT" for more details.
If your taxable income is more than $400,000 ($450,000 for married couples filing jointly), your capital gains tax has increased, too, from 15% to 20%. (High earners also face higher income tax rates and a new 0.9% Medicare surtax on salaries and self-employment income.)
It's too late to do anything about capital gains taxes incurred during 2013, but if you sell highly appreciated investments in 2014 or beyond, consider offsetting these gains by selling investments that have lost money, too. That's a particularly good idea if the new high-earner capital gains taxes and/or Medicare surtaxes apply. If you are not in a rush to sell a highly appreciated asset, consider postponing the sale until a future calendar year when you fall below the high-earner tax thresholds.
What's the quickest way to get my tax refund?
Tax preparers are hearing this question a lot this year. The best way to speed up a refund is to eFile the return and request direct-deposit of the refund into a bank account. Your refund should reach you in around seven business days.
Warning: Double-check that you or your tax preparer entered your bank account number correctly on your tax return. It might be impossible to recover the money if your refund is accidentally sent to someone else's back account.
Source: Gregg R. Wind, CPA, a partner with Wind & Stern, LLP, a Los Angeles-based accounting firm. He has more than 25 years of experience as a CPA, is former vice chair of the California Society of Certified Public Accountants and is a former member of the governing council of the American Institute of Certified Public Accountants. WSCPAs.com