Top Tax Developments of 2014 with Impact on Individual Taxpayers in 2015January 26, 2015
William C. Moore, Jr., CPA
2014 was a notable year for tax developments for individual taxpayers on a number of fronts; unfortunately, many of the significant decisions were not made until very late in 2014. Selecting the "top” tax developments requires judgment calls based upon uniqueness, taxpayers affected and forward-looking impact on 2015 and beyond—there were certainly others that may prove more significant to any particular client.
Please feel free to contact any of our tax professionals for a more customized look at the impact of 2014 developments upon your unique tax situation.
Affordable Care Act
In many ways, 2014 was a transition year for the Affordable Care Act. One of the most far-reaching requirements, the individual shared responsibility provision, took effect on January 1, 2014. This provision requires individuals to have minimum essential health insurance coverage or be subject to additional taxes (unless an exception applies). Another key provision, the employer shared responsibility, was delayed from 2013 to 2015. However, employer reporting under Code Sec. 6605 was not delayed.
The IRS also issued guidance on the Code Sec. 36B premium assistance tax credit and other provisions of the Affordable Care Act. Meanwhile, the Supreme Court announced it would review a decision by the Fourth Circuit Court of Appeals upholding IRS regulations on the Code Sec. 36B premium assistance tax credit, a critical component to making the Affordable Care Act viable nationwide.
The IRS and Treasury increased their focus on requirements that U.S. taxpayers report foreign income and assets. The government took the final steps to implement the requirements for U.S. taxpayers and foreign financial institutions to report foreign assets under the Foreign Account Tax Compliance Act (FATCA). The government also tweaked its programs to induce U.S. taxpayers to report undisclosed income and assets from prior years. At the same time, the IRS and the Department of Justice went to court to seek civil and criminal penalties, including jail time, against willful tax evaders.
Net Investment Income (NII) Tax
Many higher-income individuals were surprised to learn the full impact of the net investment income (NII) tax on their overall tax liability when their 2013 returns were filed. Starting in 2013, taxpayers with qualifying income have been liable for the 3.8 percent NII) tax. The adjusted gross income (AGI) threshold amounts for the NII tax are: $250,000 for taxpayers filing a joint return or filing as a surviving spouse, $125,000 in the case of a married taxpayer filing a separate return and $200,000 in any other case. Recent run-ups in the financial markets, and the fact that the NII thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax.
A number of changes have been made during 2014 affecting IRAs and other qualified plans which, cumulatively, rise to the level of a “top tax development” for 2014:
- Notice 2014-54 now permits a taxpayer with a 401(k), 403(b) or 457(b) account to have taxable and non-taxable portions of a distribution directed to separate accounts.
- TD 9673 now permits IRA holders and defined contribution plan participants to obtain a “longevity” annuity to help ensure that they will not outlive their required minimum distributions (RMDs).
- Notice 2014-66 now permits defined contribution plans to offer deferred annuities through target date funds (TDFs).
- Bobrow, TC Memo. 2014-21, held that, in contrast to the IRS guidance in Publication 590, a taxpayer is limited to one 60-day rollover per year for all IRA accounts under the tax code rather than one 60-day rollover per year for each IRA account. The IRS, in Announcement 2014-32, stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after January 1, 2015.
- Clark v. Rameker,a 2014 Supreme Court decision, found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code.
Although clearly not confined to the area of federal tax, identity theft has been a major issue for both the IRS and taxpayers. In 2014, the IRS put new filters in place and took other measures to curb tax-related identity theft. The agency also worked with software developers, financial institutions and the prepaid debit card industry to combat identity theft. "We rejected 5.7 million suspicious returns last year that may have been tied to identity theft," IRS Commissioner Koskinen said.
After the Supreme Court struck down Section 3 of the Defense of Marriage Act in Windsor, the IRS issued guidance in 2013 adopting a place of celebration approach to recognizing same-sex marriage. The IRS followed up with additional guidance in 2014 that required employers to take note of Windsor with regard to workplace tax benefits. Notably, the IRS focused on what changes needed to be made to retirement plan benefits in light of Windsor.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.