Tax laws are large, complicated and forever changing. The 2014 tax year has some notable changes, both good and bad, that will affect a large number of American citizens. Keeping track of these changes is important, because it can have drastic consequences on income tax returns. The following major changes all have to do with federal tax returns.
Health Insurance Tax Changes:
The most notable and drastic change to taxation law for 2014 involves Obamacare and the use of the new health insurance exchange system it implemented. There are two major factors involved. The first is a penalty for not enrolling in an acceptable coverage program. The second is the financial aid that is available to certain lower income individuals to help them afford acceptable coverage.
The Penalty:
Starting in 2014, individuals who do not enroll themselves in an “acceptable” health insurance policy will face a penalty that is collected as a tax at the end of the year. There has been some debate on Capitol Hill about cancelling or extending the deadline on this mandate, but as of February 2014, the mandate still stands. There are certain exemptions for very low income individuals and those who meet certain other conditions. The 2014 penalty is rather small at $95 for the year. That pales in comparison to the thousand or more dollars a year it would take to pay minimum essential insurance premiums. This cost quickly escalates the following years. The planned penalty for 2015 is $325, and the planned penalty skyrockets to $695 in 2016. While these penalties are still lower than the total for monthly premiums, the idea is that most people would rather put their money toward insurance than just hand it over to the government.
Everyone has a three month grace period to enroll, so the penalty will not kick in unless they go more than three months out of the year uninsured. There is a catch, however. Open enrollment for insurance ends the last day of March, so if someone does not enroll by then, they will have to wait until November to enroll, and that will bring them over the three month grace period by default (http://obamacarefacts.com/obamacare-individual-mandate.php).
The Tax Credit:
The reverse of the penalty is the tax credit for enrolling in a qualified policy. Anyone who falls between 100 percent and 400 percent of federal poverty line in annual income will be able to collect the tax credit (http://obamacarefacts.com/federal-poverty-level.php). In most states, those lower than 100 percent will automatically be enrolled in Medicaid and will not be affected. There are, however, multiple states that have opted-out of expanding their coverage, and may fall into a coverage gap.
This tax credit can be provided monthly as a way to lower premium payments, or it can be provided as a lump sum on a person’s tax return. The exact amounts of payment are only final when the income is reported. Any differences between monthly payments and the actual coverage are made up for as tax debt or credit on the return. If someone ends up with a credit, then that can be collected as cash on their return, even if they were on the monthly plan.
Other Tax Changes:
There are a myriad of other, less major, changes. Here are some highlights of previous exemptions that are set to expire.
1. Option to deduct sales tax
2. Option to deduct higher education tuition and fees up to $4,000 for most individuals.
3. Transit pass tax break reduced from $245 to $130.
4. The option to deduct up to $500 for improvements to home energy efficiency.
5. Option for teachers to deduct up to $250 in school or classroom related expenses that they paid out of their own pockets.