There are many important tax changes taking effect in 2014. They are the result of tax legislation enacted in prior years, or are triggered by effective dates in regulations, rulings and other guidance. Also, a number of important final regulations go into effect in 2014.
- Individuals not carrying health insurance face a penalty. For tax years beginning after Dec. 31, 2013, nonexempt U.S. citizens and legal residents must pay a penalty if they do not maintain minimum essential coverage, which includes government sponsored programs (e.g., Medicare, Medicaid, Children’s Health Insurance Program), eligible employer-sponsored plans, plans in the individual market, certain grandfathered group health plans and other coverage as recognized by HHS in coordination with IRS. There are a number of exceptions, such as one for certain lower-income individuals. Also, individuals who received a notice saying that their current health insurance plan is being cancelled also may qualify for an exemption.
- Refundable tax credit for low- or moderate-income families buying certain health insurance. For tax years ending after Dec. 31, 2013, a new refundable tax credit (the “premium assistance credit”) applies to qualifying taxpayers who get health insurance coverage by enrolling in a qualified health plan through an Exchange.
- “Qualified health plans” may be offered through cafeteria plans by “qualified employers.” For tax years beginning after Dec. 31, 2013, a reimbursement (or direct payment) for the premiums for coverage under any “qualified health plan” through a health insurance Exchange is a qualified benefit under a cafeteria plan if the employer is a qualified employer (generally, smaller businesses). In very broad terms, a qualified health plan is one that meets certain certification requirements, provides “an essential health benefits package,” and is offered by an insurer meeting detailed requirements.
- . For calendar years beginning after Dec. 31, 2013, an annual fee applies to health insurance providers. The aggregate annual flat fee for the industry (e.g., $8 billion for 2014) will be allocated based on a health provider’s market share of net premiums written for a U.S. health risk for calendar years beginning after Dec. 31, 2012. The fee will not apply to companies whose net premiums written are $25 million or less. For purposes of the fee, health insurance does not include: coverage only for a specified disease or illness; hospital indemnity or other fixed indemnity insurance; insurance for long-term care; or any Medicare supplemental health insurance.
- Reduced total assets threshold for Schedule UTP. In general, certain corporations meeting a total assets threshold must report on Schedule UTP (Uncertain Tax Positions Statement) each federal income tax position taken by the corporation on its federal income tax return for the current tax year or an earlier tax year, if either: (a) the corporation or a related party has recorded a reserve with regard to that tax position for U.S. federal income tax in audited financial statements; or (b) the corporation or related party did not record a reserve for the tax position because the corporation expects to litigate the position. The total asset threshold for filing Schedule UTP falls to $10 million starting with 2014 tax years (it had been $50 million starting with 2012 tax years and $100 million beginning with 2012 tax years).
- Lower standard mileage allowance rate. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will decrease by 0.5¢ to 56¢ per mile for business travel after 2013. This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also decrease by 0.5¢ to 23.5¢ per mile.
- FATCA implementation. Chapter 4 of the Code requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless the FFI has entered into an agreement with IRS to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities. The statutory provisions are generally effective for payments made after Dec. 31, 2012, but their implementation has been delayed and phased in over several years. In January of 2013, IRS issued final FATCA regs that, among other things, provided for a phased implementation of the FATCA requirements over the 2014 through 2017 period. Also beginning Jan. 1, 2014, U.S. and foreign financial institutions (but not other payors) that are required to report payments made under FATCA must electronically file Forms 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding), regardless of the number of 1042-S forms they are required to file.
- Final regs clarifying 3.8% surtax on investment income & gains go into effect. For tax years beginning after Dec. 31, 2012, certain unearned income of individuals, trusts, and estates is subject to a surtax (i.e., it’s payable on top of any other tax payable on that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax” (NIIT), is 3.8% of the lesser of (1) “net investment income” (NII) or (2) the excess of modified adjusted gross income (MAGI) over the unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). In November of 2013, IRS issued final regs that provide guidance on the 3.8% surtax. The final regs are generally effective for tax years beginning after Dec. 31, 2013, but taxpayers may apply many of the provisions of the final regs to tax years beginning after Dec. 31, 2012.
- Final regs go into effect allowing agents to handle FUTA for home care service employers. In December of 2013, IRS issued final regs that allow a home care service recipient to designate an agent, to report, file, and pay all employment taxes, including those due under the Federal Unemployment Tax Act (FUTA). The regs also allow an intermediary to file a single FUTA return on behalf of multiple home care service recipients. The regs apply to wages paid on or after Jan. 1, 2014, but can be relied on for all tax years for which a valid designation is in effect.
- Revised rules for tips and service charges go into effect. In 2012, IRS issued updated guidance on how employers differentiate between tips which are subject to special FICA tax rules, and service charges (mandatory add-ons to food and drink bills that are distributed by the employer to wait staff), which must be treated as wages and not as tips. Although the guidance generally was effective immediately and applicable retroactively, it was to have applied prospectively by auditors, i.e., only to amounts paid on or after Jan. 1, 2013, if certain conditions were satisfied. In Ann. 2012-50, 2012-52 IRB, IRS announced that it was extending to on or after Jan. 1, 2014 the time for businesses to comply with the proper treatment of service charges that was specified in Rev Rul 2012-18.
- Increased fees apply. Under final regs issued in December of 2013 , the fee for entering into a regular installment agreement on or after Jan. 1, 2014, is increased from $105 to $120. Also effective Jan. 1, 2014, the fee for processing an offer in compromise (OIC) increases from $150 to $186. However, low-income taxpayers and taxpayers making offers based solely on doubt as to liability will continue to pay no fee.
There is a significant piece of business legislation, particularly that dealing with depreciation, which expired at the end of 2013. We expect Congress to make retroactive changes to this law, but it is currently uncertain as to the full impact of these changes. We will keep you updated as this legislation progresses.
If you have any questions regarding the changes to 2014 or their specific implications to your situation, please do not hesitate to contact us.