The 2014 tax filing season officially opened on January 20th and by now, you should have received all of the documents necessary to attack your taxes. For the technophobes out there, the IRS has a reminder: filing electronically is the most accurate and fastest way to get a refund. The error rate for electronically filed returns is less than one percent, compared to 20 percent for paper returns. The IRS said that the average tax refund for past few years has been about $3,000 and like last year, the IRS expects to issue more than nine out of 10 refunds within 21 days. Because of IRS budget cuts, it will likely take an additional week or more to process paper returns, which means that the IRS will likely issue those refunds in seven weeks or more.
And another outcome of the smaller IRS staff: the agency is unlikely to answer even half the telephone calls it receives and taxpayers who miraculously manage to get through, are expected to wait on hold for 30 minutes on average and considerably longer at peak times. In other words, try to use IRS.gov.
Now, on to the changes for this filing season! This year’s return will include new questions to incorporate provisions of the Affordable Care Act (or ACA). According to the IRS, there are four basic categories when it comes to the ACA:
- Covered with qualifying insurance (employer-provided coverage, Medicare, Medicaid, CHIP, Cobra): The IRS has said that the majority of taxpayers - more than three out of four – will fall into this category. These people will simply check a box acknowledging coverage.
- Qualifies for an exemption: Those who can not afford coverage, are not U.S. citizens, had a gap in coverage for less than three consecutive months, are a member of a recognized religious sect with objections to health insurance, are a member of a federally recognized Indian tribe are among those who qualify for exemptions. (Go here to review the full list of exemptions.) Eligible taxpayers need to complete the new IRS Form 8965.
- Will make the Individual Shared Responsibility Payment: If you don’t have qualifying coverage and do not qualify for an exemption, you have to pay the greater of: $95 per uninsured adult in each household, capped at $285 per household or one percent of household income.
- Will Claim Premium Tax Credit: If you received healthcare through the marketplace and qualified for atax credit, you should have received tax form 1095A by now, which contains details of your coverage and premium tax credit. If you don’t receive the form or misplace it, the federal and most state exchanges should make them available online. If you benefited from advance payments of the premium tax credit, you may see a different tax refund/liability than you were expecting. Use IRS Form 8962 to calculate the premium tax credit and reconcile the credit with any advance payments.
With ACA out of the way, the rest of your taxes should be a breeze, because most of the rest of the changes are inflation adjustments to various thresholds. That’s because at the end of 2014, Congress reauthorized more than 50 tax breaks (the so-called “extenders” or The Tax Increase Prevention Act), including:
- The deduction for state and local sales taxes: The option to deduct state and local sales taxes instead of deducting state and local income taxes could be beneficial those who live in no-income tax states. If you didn’t keep your sales-tax receipts, use the IRS’s sales tax deduction estimator
- Above-the-line deduction of up to $4,000 for higher education expenses
- $250 above-the-line deduction for teachers’ supplies
- The ability to exclude up to $2 million in discharge of residential mortgage indebtedness from gross income
- The deduction for mortgage insurance premiums
- Energy-efficient home improvements tax credit
- Tax-free distributions from an Individual Retirement Account for charitable purposes for taxpayers over 70 ½.
This is just the beginning – are we having fun yet? Stay tuned for another post, where I will review deductions, credits and Individual Retirement Accounts (IRAs).