The further we go into the future, the less certain we are about IRS rules and regulations. We know how things are now – and we know something about what is planned – but if the Affordable Care Act (Obamacare) is any indicator, those plans are subject to change. Tax year 2014 rules may not be clear yet but here is what we know now along with ways to make your finances more tax efficient.
Start by Tweaking Your W-4
Your W-4 determines the amount withheld from your check each pay period. If you do nothing, your employer uses IRS-provided calculations for determining how much to withhold.
You can adjust the amount withheld, and you should, especially if it doesn’t closely match your tax liability each year. Not only should you tweak your W-4 for the 2013 tax year, you should reevaluate your withholdings each year.
How will you know if you need to make adjustments? Obviously, a significant change in income – up or down – will have tax consequences. If you plan to retire in 2014, will you receive a bonus or severance? Will you be cashing in a tax-favored retirement fund?
If you know – or believe – any of these things might happen, run the IRS Withholding Calculator to check the impact of those events.
In addition, keep an eye on www.irs.gov/w4. Information about anything that might affect Form W-4 is posted there.
Affordable Care Act
Several parts of the Affordable Care Act, also known as Obamacare, will go into effect and they could impact your tax situation.
One potential positive aspect of Obamacare has to do with a tax credit you can use right away – as opposed to taking it when you file your taxes in 2015.
The credit applies to taxpayers who obtain health insurance by enrolling through the Health Insurance Marketplace in October 2013.
The tax credit can be used to lower your monthly health care premiums beginning in 2014.
Go to Healthcare.gov for detailed information about the credit and how it works.
For additional information about the future impact of the Affordable Care Act, visit Affordable Care Act Tax Provisions on the IRS website.
Investments as Tax Strategy
We may not know precisely what the IRS has in store for 2014, but when it comes to investments, thinking long-term is definitely a tax advantage. Hold on to investment positions at least one year to avoid long-term capital gains taxes and speak with an investment advisor about making your investment portfolio more tax-efficient.
Also, be mindful of the fact that allowable contributions to IRAs, 401(k)s, and other tax advantaged accounts are adjusted each year for inflation. The tax year 2014 contribution limits haven’t been released, but between 2012 and 2013, they increased $500 for IRAs and 401(k)s.
Contribution limits for IRAs last year were announced in October on the IRS website on a page titled Retirement Topics – IRA Contribution Limits. The IRS 401(k) Resource Guide lists limits for 401(k) plans.
Tax Law Changes
Did you know there is a free service you can subscribe to that will provide information about tax law changes, provide helpful tips, and send you IRS announcements as they’re published?
Subscribe to IRS Tax Tips at the IRS website or download the IRS2Go mobile app. If you have an Apple mobile device, you can download the app at the iTunes app store. If you have an Android device, visit Google Play.
Follow the Budget Talks
Currently, there are three versions of the federal budget. The next step is for both chambers of the Congress and the White House to combine the three versions into one they agree to pass.
The White House budget includes numerous proposed tax increases starting in fiscal year 2014. Some of those include a cap on itemized deductions at 28 percent, lifetime contribution caps to tax-advantaged retirement accounts, an increase in the cigarette tax, and more.
While it’s unlikely that most of the current proposals will pass, most agree that taxes will continue to rise. Who will feel the burden of those increases is unknown.
There is still a lot of wrangling in Washington that will take place before 2014 tax law becomes clear but Obamacare, the fiscal year 2014 budget, and the normal changes based on economic growth factors will impact consumers.
For now, continue to follow common-sense rules like saving more than you make, keeping an emergency fund, and working with tax and accounting professionals to make your finances as tax-efficient as possible.
For more resources that can help you to make informed tax-related decisions, visit the following IRS publications:
- Publication 505, Tax Withholding and Estimated Tax
- Publication 552, Recordkeeping for Individuals
- Choosing a Tax Professional
- Schedule A, Itemized Deductions and instructions
What are you doing to prepare? Leave a comment!
About the Author: Gerrid Smith is CEO of the charity-focused coupon website, Save1. They provide coupons and deals from over 5,000 online stores! Each time a coupon is used, they provide a meal to a child in need. You can connect with Save1 on Twitter, Facebook and Google+.
Photo Credit: Alan Cleaver