The IRS recently issued a long list of cost of living adjustments (COLAs) for various Tax Code provisions in 2014 that are dependent upon the CPI-U index average from September 2012 through August 2013. The Tax Code requires that federal income tax brackets and certain other figures be adjusted annually for inflation. Because of inflation and rounding conventions, many provisions increase for 2014.
At the same time, the IRS announced that many retirement plan contribution and benefit limits will increase slightly in 2014. The Social Security Administration (SSA) also announced that the maximum amount of earnings subject to Social Security will increase for 2014. The 2014 wage base will increase to $117,000, up from $113,700 for 2013. (The $3,300 increase reflects an overall rise in average total wages.)
Tax Code inflation adjustments
- Nanny tax. For 2014, the domestic employee coverage threshold, as adjusted for inflation, is $1,900. This reflects an increase from $1,800 for 2013. Earnings below the domestic employee coverage threshold are not taxable under Social Security.
- Personal exemptions. Personal and dependency exemptions will increase from $3,900 in 2013 to $3,950 for 2014.
- Standard deductions. Standard deductions will increase for 2014 to $12,400 for married joint filers (up from $12,200 for 2013) and $6,200 for single filers and married separate filers (up from $6,100 for 2013). For heads of household, the standard deduction will be $9,100 (up from $8,950 for 2013).
- Limitation on itemized deductions. For 2014, the amount of itemized deductions that can be claimed will begin to phase out for certain taxpayers whose income exceeds $305,050 (married joint filers); $279,650 (heads of household); $254,200 (single filers); or $152,525 (married separate filers).
- Estate and gift tax. The gift tax annual exemption will remain the same for 2014, at $14,000. However, the estate and gift tax applicable exclusion will increase from $5,250,000 for 2013 to $5,340,000 for 2014.
- AMT exemptions. For 2014, the alternative minimum tax (AMT) exemption for married joint filers and surviving spouses will be $82,100 (up from $80,800 for 2013). For heads of household and unmarried single filers, the exemption will be $52,800 (up from $51,900 for 2013). For married separate filers, the amount will be $41,050 (up from $40,400 for 2013).
- Elective deferrals. The limits on elective deferrals for employees who participate in 401(k)s, 403(b)s, certain 457s, and Thrift Savings Plans remain $17,500 for 2014.
- Catch-up contributions. Eligible individuals age 50 and above may make catch-up contributions to IRAs, 401(k)s and other savings arrangements. The catch-up amount for 401(k)s, 457s, 403(b)s, and SEPs, remains $5,500 for 2014.
- Defined contribution plans. The limitation for Code Sec. 415(c)(1)(A) defined contribution plans will increase from $51,000 for 2013 to $52,000 for 2014.
- Traditional IRAs. For 2014, the maximum deductible amount under Code Sec. 219(b)(5)(A) for an individual making qualified retirement contributions to traditional IRAs and similar plans will remain $5,500. The allowable IRA deduction will phase out when modified AGI is between $60,000 and $70,000 for single taxpayers who are active participants in an employer-sponsored retirement plan (up from $59,000 and $69,000 in 2013). For married couples filing a joint return, where the spouse making the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $96,000 to $116,000 (up from $95,000 to $115,000 for 2013).