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What’s New for 2014 – Tax Changes Effective this Year

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.

Capitalization rules in final regulations go into effect. In general, the final capitalization regulations published in September of this year apply to tax years beginning on or after Jan. 1, 2014, but a number of special rules in the regulations, such as the de minimis safe harbor election of Reg. § 1.263(a)-1(f), apply to amounts paid in tax years beginning on or after Jan. 1, 2014. Also note that complex transitional rules apply to earlier years at the taxpayer's election.

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. (Code Sec. 5000A) 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") under Code Sec. 36B 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). (Code Sec. 125(f)(3)(B)) 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.

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 employees 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.

Final regulations 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). (Code Sec. 1411(a)(1), Code Sec. 1411(b) ) In November of 2013, IRS issued final regulations that provide guidance on the 3.8% surtax (T.D. 9644). The final regulations are generally effective for tax years beginning after Dec. 31, 2013, but taxpayers may apply many of the provisions of the final regulations to tax years beginning after Dec. 31, 2012.

Final regulations go into effect allowing agents to handle FUTA for home care service employers. In December of 2013, IRS issued final regulations (T.D. 9649) that allow a home care service recipient to designate an agent under Code Sec. 3504, to report, file, and pay all employment taxes, including those due under the Federal Unemployment Tax Act (FUTA). The regulations also allow an intermediary to file a single FUTA return on behalf of multiple home care service recipients. The regulations 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 in Rev Rul 2012-18, 2012-26 IRB 1032, 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.