Five Huge 2014 Tax Law Changes You Need to Know About

See the updated list of tax law changes for 2015

Tax law changes every year. Laws are updated, loopholes are closed and other adjustments are made. Some of these changes affect virtually all wage earners while others might affect only small businesses or higher-income taxpayers.

Last tax period, many filers experienced a significant decrease in their take-home pay thanks to 2013 tax law changes. This year, the news might not be all bad.

In fact, a few imminent tax law changes will result in some taxpayers enjoying a little more jingle in their pockets. On the other hand, a group of taxpayers could be facing new penalties based on their health insurance status.

New Tax Laws for 2014

1. FICA and Medicare Taxes

Last year, many filers noticed a startling increase in their taxes thanks to FICA tax hikes.

FICA, or the Federal Insurance Contribution Act, includes both Social Security and Medicare taxes. The current FICA tax rate is 7.65 percent. Higher-income earners might be facing an additional 0.9 percent tax, which results in an effective tax rate of 2.35 percent for single taxpayers who earn more than $200,000 and joint filers who earn more than $250,000 a year.

Self-employed taxpayers pay 15.3 percent in FICA taxes, because they don’t have an employer with which to share the cost.

These increases were due in part to the projected cost of Social Security growing faster than its income. While there will be no tax increase this year related to FICA, the wage base is slated to increase.

The wage base is the maximum amount of income that can be taxed for Social Security purposes. In 2013, the wage base was $113,700; this year, the wage base is predicted to increase to $115,500.

Related article: Married Filing Jointly Vs. Married Filing Separately on Taxes

2. Exemptions and Deductions

The tax code is designed to accommodate inflation. Although many Americans are extremely wary of inflation, this adjustment can actually help taxpayers save. Adjustments ensure that filers are in the appropriate tax bracket, but they also affect tax breaks such as exemptions and standard deductions.

In 2014, these adjustments could save middle-income married couples as much as $200. Single filers will see savings, as well. Personal exemptions will also be adjusted for inflation, and limits for IRA contributions, education credits and similar benefits will increase.

Some taxpayers could still benefit from itemizing their deductions; anyone interested in doing so should discuss options and scenarios with a licensed tax professional.

3. The Affordable Care Act

The Patient Protection and Affordable Care Act could well be the biggest change to taxes in 2014. Employers with more than 50 full-time equivalent employees will be facing a tax penalty if they fail to provide affordable essential health coverage to their employees.

Individuals who fail to purchase coverage might also be subject to a penalty. Adults could be facing a fine of $95, while the penalty for uninsured children will be $47.50. This fine will increase annually and, by 2016, will be $695 per adult or 2.5 percent of the total household’s taxable income, whichever is greater.

On the flip side of the penalty are new tax credits and subsidies. Employers with fewer than 50 full-time employees and non-profit organizations could be eligible for tax credits if they meet the minimum coverage requirements.

Individuals will not receive tax credits but could be eligible for subsidies that help them purchase coverage through state or federal health insurance exchanges.

4. Students Loans

Many struggle to pay their student loans after graduation. In 2014, students who receive loans to fund their education will have more affordable payments that will not exceed 10 percent of their income.

Some students will be eligible to have their debts forgiven after a decade, including those who are in the military, and those who work as nurses or teachers. Other students could also be eligible for debt forgiveness after 20 years.

Keep reading: 10 Common Tax Deductions You Shouldn’t Miss

5. Other Tax Law Changes

Other changes have also been proposed. One proposal that is estimated to reduce the deficit by $44 billion over the next decade would repeal tax preferences for oil, gas and coal producers.

New jobs and wage increases could offer a temporary 10 percent tax credit, and investing in advanced energy manufacturing would also merit new tax credits.

Additional proposals have been made to create small-employer tax credits, expand the child and dependent care tax credit, and reform the low-income housing tax credits. The federal tax on tobacco products and cigarettes may be increased as well.

Many of the tax law changes on the horizon would be beneficial to a large percentage of taxpayers. Both refundable and non-refundable tax credits could significantly decrease the tax burden of individuals or couples. However, it is important that wage earners discuss their unique situations with a tax professional.

This article was written by Chad Fisher. He enjoys sharing his insights on tax changes with an online audience; his goal is to inform families on financial issues that impact their everyday lives. If you are money minded like Chad, he recommends looking for finance jobs with 

Photo credit: John-Morgan

  • Georgina

    Could you please elaborate on how inflation affects my taxes? Do i actually collect a credit, or is inflation considered in the overall tax amount I owe by the IRS? I do not itemize. Thanks.

    • Geoff

      The tax brackets are indexed for “inflation” as the government calculates it. In short, the 10% tax bracket for 2012 was between $0 – 8,700 of taxable income; in 2013 the same 10% tax bracket is $0 – 8,925. Therefore, the inflation adjustment moved the bracket up $225. This would allow for a small raise without moving you into the 15% tax bracket.

      This is unaffected by using the standard deduction or by itemizing, as that’s only a step in the process of determining how much taxable income you may have accrued.

      Food for thought: Inflation DOES increase the amount of sales tax that a state may collect (6% on $1 = 6 cents; 6% on $2 = 12 cents). So, if you live or spend much time in a sales tax collecting state; your tax payments MAY rise quite substantially with inflation. This is good for the state as it can take in more sales tax revenue and pay back its creditors (bond holders) with money that has a lower value than it received.

  • Matt

    My wife and I are buying a home. Closing will not be until end of January 2014. Are we going to be able to deduct the PMI for the duration of the FHA Loan. OUr combined income is about 84,000.