For regular taxpayers and investors, the next few weeks are critical in protecting 401(k) assets from the jaws of the Internal Revenue Service, which likes nothing better than to sharpen its teeth on the ankles of inattentive and lax investors.
In the spirit of the theme “there’s no information like new information,” let’s play catch-up on the newest retirement investment-related tax rules handed down by Uncle Sam in 2014 and put as many of them as needed into play before the year ends on December 31st.
Higher Assets, Higher Taxes
No matter how you look at it, you’re going to pay more for your 2014 taxes based on annual income than you did in 2013.
That’s a big factor for investors who may have less to pour into the financial markets and their retirement funds than they did in 2013.
The big reason is this: the Bush-era tax cuts are officially a thing of the past now, as marginal tax rates are on the rise in 2014.
Consequently, mastering your 401(k) plan — or any retirement plan, for that matter — requires mastering the fine art of reducing your annual tax burden, which changes in 2014.
Officially, taxpayers are looking at seven new tax brackets: at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Here’s what you’ll need to know about your tax rate when you sit down to prepare your 2014 taxes:
| Tax Rate | Single Filer | Married Filing Jointly |
| 10% | Up to $9,075 | Up to $18,150 |
| 15% | $9076 to $36,900 | $18,151 to $73,800 |
| 25% | $36,901 to $89,350 | $73,800 to $148,850 |
| 28% | $89,351 to $186,350 | $148,851 to $226,850 |
| 33% | $186,450 to $405,100 | $226,851 to $405,100 |
| 35% | $405,101 to $406,750 | $405,101 to $457,600 |
| 39.6% | $406,751 or more | $457,600 or more |
Also note that higher-income Americans could also have deductions and personal exemptions cut, and they’ll take an added burden in the form of higher capital gains taxes from stocks, bonds, real estate, and other investments.
Standard deductions: Standard filing deductions rise to $12,400 for taxpayers married filing jointly (from $12,200), $9,100 for taxpayers filing as head of household (from $8,950), and $6,200 for single taxpayers (from $6,100).
New exemption levels: Congress has hiked the personal exemption amount to $3,950 from $3,900 in 2013.
Estate taxes: There’s now an estate tax rate at 40%, along with an estate tax exemption of $5.34 million, up from $5.25 million
Contributions to 401(k) plans: Workers can contribute up to $17,500 to their 401(k) plans.
IRA plans: Americans saving for retirement can contribute $5,500 to their individual retirement plans, or $6,500 for Americans age 50 and over.
Mileage deductions: According to the IRS, mileage rates for business and medical rose to $0.565 and $0.24, respectively. Note the mileage rate for charity mileage still stands at $0.14.
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While it’s important to know and leverage these changes to the tax code, your tax planning shouldn’t end there. There are many moves you can make to lower your tax burden, keeping more money in your pocket and giving less to Uncle Sam come April 15.
Here’s another list, this one put together by the California Society of CPAs. It details some common-sense but oft-overlooked tax tips.
Here’s a glimpse of what the society is calling your “2015 New Year’s financial checklist”:
Weigh the possibility of any alternative minimum tax: The society advises Americans to calculate any potential AMT tax burden. “The AMT parallels the regular income tax,” says the association. “However, different rates apply, as do different definitions, deductions, exemptions and credits.”
Boost your 401(k) payments: As noted above, Americans can contribute more to their 401(k) plans this year, and that means opportunity for retirement savers.
The society says that even contributing an extra $200 per month for 25 years can boost your account by $190,000, assuming your investments return 8% per year.
“You’ll only see $150 less in each paycheck if you’re in the 25% bracket,” the society says. “Plus, you could get free money if your employer matches your contributions. For example, a 50-cent-per-dollar match is like getting an extra 50% return on your money.”
Watch out for ACA tax: If you didn’t sign on to the Affordable Care Act and you remain uninsured, you could be facing a decently sized tax bill (but don’t call it a “fee” or “penalty” — the Supreme Court didn’t see the ACA that way).
If you don’t purchase health care coverage or an insurance plan, the “tax” charge for 2014 is either 1% of your yearly household income or $95 per uninsured adult and $47.50 per child, up to $285 for a family. Expect to cough up whichever amount is higher.
Note that if you buy health care insurance for part of the year, your penalty will be prorated.
Get your tax records organized now: The society says January 2015 is the best month to organize your financial documents for future use, but if you have the time, do that now for the 2014 tax year, especially now that the final bills for 2014 are rolling in.
That saves time when you need it most. “You wouldn’t want to miss out on valuable deductions because you’re scrambling around at the last minute,” the group says.
The takeaway?
Don’t sit tight on new tax changes for 2015 that can negatively impact your assets and your retirement investments.
Uncle Sam already has enough of your hard-earned cash. Do what you can to keep more of it in your pockets.
Until next time,
Brian O’Connell for Wealth Daily
