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IRS Announces Retirement Plan Contribution Limits for 2015

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On October 23, 2014, the Internal Revenue Service (IRS) announced the tax-year 2015 cost of living adjustments (COLAs) affecting the dollar limitations for pension plan contributions and plan contributions for other retirement-related plans. While many pension plan limitations will change for 2015 because the COLAs met the statutory thresholds triggering their adjustment, not all limitations met the necessary threshold, and will thus remain unchanged.

This article will briefly explain some of the notable items that are changed and unchanged for tax year 2015; the article is not intended to convey tax or legal advice.

401(k), 403(b), 403(b), Most 457 Plans, and the Federal Government’s Thrift Savings Plan

The annual elective plan contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will increased from $17,500 in 2014 to $18,000 in 2015.

The 401(k) Catch-Up Plan Contribution Limit

For employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, the catch-up contribution limit will increase to $6,000 in 2015, up from $5,500 in 2014.

Contribution Limitations to an Individual Retirement Arrangement

The annual contribution limitation to an Individual Retirement Arrangement (IRA) will remain unchanged at $5,500. Furthermore, the additional catch-up contribution limit for those individuals aged 50 and over is not subject to annual COLAs, and will also remain unchanged, at $1,000.

Roth IRA Phase-Outs

For taxpayers making contributions to Roth IRA’s, the AGI phase-out range will increase to $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For single individuals and heads of household, the income phase-out range will be $116,000 to $131,000 in 2015, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to annual COLAs, and the range will remain from $0 to $10,000.

Deductible IRA Phase-Outs

For taxpayers making contributions to a traditional IRA, the 2015 deduction phases out for singles and heads of household who are covered by a workplace retirement plan and have modified AGI between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range will increase to $98,000 to $118,000 for 2015, up from $96,000 to $116,000.

For IRA contributors not covered by workplace retirement plans, and who are married to someone who is covered, the deduction will phase out between $183,000 and $193,000 (for the couple’s income), up from $181,000 and $191,000 in 2014. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to annual COLAs; this range will remain changed at $0 to $10,000.

The Saver’s Credit

The Adjusted Gross Income (AGI) limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers will be $61,000 for married couples filing jointly for 2015, up from $60,000 in 2014; $45,750 for heads of household, up from $45,000; and $30,500 for married individuals filing separately and for single individuals, up from $30,000.

Defined Benefit and Defined Contribution Plans

The contribution limit for defined benefit plans (under Internal Revenue Code Section 415(b)(1)(A)) will remain unchanged at $210,000 for 2015. The annual limitation for defined contribution plans (under IRC Section 415(c)(1)(A)) will increase to $53,000 in 2015, up from $52,000 in 2014.

Student Loan Interest Deduction and 2014 Phase-outs

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With the costs of higher education increasing each year, the deductibility of interest paid on student loans is an important tax topic for many younger individuals. However, taxpayers are sometimes surprised to learn that there is a phase-out for various applicable income levels for this deduction, and above certain income levels, the deduction is completely eliminated.

This article will briefly explain the basics of the deduction for interest paid on student loans, as well as the deduction phase-outs. This explanation is not intended to convey tax or legal advice.

Student Loan Interest

Under IRS tax rules, interest paid for personal loans is typically not deductible for taxpayers; however, there is an exception to this general rule for interest paid on higher-education student loans (also referred to as education loans). Because this deduction is taken as an adjustment to income, qualifying taxpayers may claim this deduction even though that may not itemize their deductions on Form 1040 Schedule A.

In order to qualify, a student loan is required to have been taken out solely to pay qualified education expenses, and the loan must not be from a related person or made under a qualified employer plan. Also, students claiming the deduction must either be the taxpayers themselves, their spouses, or their dependents, and students must be enrolled at least half-time in a degree program (see applicable IRS publications for more specific definitions).

For 2013, qualifying taxpayers may reduce the amount of their income subject to taxation by the lesser of $2,500 or the amount of interest actually paid with this deduction. Taxpayers may claim the deduction if all of the following requirements are met: (1) they file under any status except married filing separately, (2) the exemption for the taxpayer is not being claimed by somebody else, (3) the taxpayer is under a legal obligation to pay interest on a qualified student loan, and (4) interest was actually paid on a qualifying student loan.

Student Loan Interest Deduction Phase-outs

The amount that a taxpayer may deduct for student loan interest paid is subject to phase-outs based upon their filing status and their Modified adjusted gross income (MAGI). For most taxpayers, MAGI will be their adjusted gross income (AGI) as determined on Form 1040 before the deduction for student loan interest is subtracted.

For taxpayers filing as single, head of household, or qualifying widow(er), and making not more than $60,000 MAGI, there is no reduction of the deduction. For taxpayers in those categories making more than $60,000 MAGI but less than $75,000, the phase-out will apply, and for taxpayers making more than $75,000 MAGI, the deduction will be completely eliminated.

For taxpayers filing as married filing jointly, and making not more than $125,000 MAGI, there is no reduction of the deduction. For taxpayers in those categories making more than $125,000 MAGI but less than $155,000, the phase-out will apply, and for taxpayers making more than $155,000 MAGI, the deduction will be completely eliminated.

The phase-out itself is usually determined by the following calculation: a taxpayer’s interest deduction (before the phase-out) is multiplied by a fraction. The numerator is the taxpayer’s MAGI minus $60,000 (or $125,000 for married filing jointly), and the denominator is $15,000 ($30,000 for married filing jointly). The result is then subtracted from the original interest deduction (before the phase-out), and this amount is what the taxpayer may actually deduct.

Second Quarter of 2014 IRS Underpayment and Overpayment Interest Rates

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On March 14, 2014, the IRS announced that the underpayment and overpayment interest rates will remain the same for the calendar quarter beginning April 1, 2014. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.

New Deduction Phase-outs for 2013 Tax Returns

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Upper-income US taxpayers should be aware that new deduction phase-out IRS rules in effect for 2013 tax returns to be filed in 2014 may increase their tax liabilities or reduce refunds. Two new important changes for high-earning individuals or couples are the new itemized deduction phase-outs and personal and dependent exemption deduction phase-outs. Because of these changes in the deduction phase-out rules, along with other new IRS rules that we have covered in previous articles, the necessity for proper tax planning will only increase in future years.

This article will briefly explain the changes in the deduction phase-out rules; it is not intended to convey tax or legal advice. Please consult a tax attorney if you have further questions. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs.

New Itemized Deduction Phase-Out Changes

Under the new US tax rules, the amount of itemized deductions that high-earning individuals or couples may take on Form 1040 is subject to a phase-out limitation. Specifically, allowable itemized deductions will be reduced by 3% of the amount of adjusted gross income (AGI) above the certain income thresholds (however, this reduction will not exceed 80% of the original total amount of a taxpayer’s itemized deductions).

The income thresholds are the following: $250,000 for single individuals, $300,000 for married filing jointly couples, $150,000 for married filing separately couples, and $275,000 for heads of households. As an example, consider a married couple filing jointly with AGI of $500,000, and $50,000 of original itemized deductions for Schedule A. Because their AGI is $200,000 over the income threshold, their allowable itemized deductions will be reduced by 3% of the excess ($200,000 multiplied by 3%, equaling $6,000). Thus, their allowable itemized deductions will be reduced to $44,000.

New Personal and Dependent Exemption Deduction Phase-Out Changes

While under the general IRS rule, the amount that taxpayers may deduct for each applicable exemption increased from 2012 (at $3,800) to 2013 (now $3,900), certain taxpayers may lose some or all of the benefit of their exemptions if their AGI exceeds certain thresholds under the new Personal Exemption Phase-out (PEP). Under this rule, the dollar amount of each personal exemption must be reduced from its original value by 2 percent for each $2,500 or part of $2,500 ($1,250 for married filing separately) that AGI is above the above specified income thresholds.
For 2013 tax year returns, the phase-out starts at the following amounts: $250,000 for single individuals, $300,000 for married filing-jointly couples and qualifying widowers, $150,000 for married filing separately returns, and $275,000 for heads of households. If taxpayer’s AGI exceeds these applicable amounts by more than $122,500 ($61,250 for married filing separately returns), their deductions for exemptions amount will be reduced to zero.

Contact Sherayzen Law Office for Help With Your Tax and Estate Planning

Combined with the new 3.8% Medicare surtax on investment income and the new 0.9% Medicare surtax on salaries and self-employment income earned by certain high-earning individuals, and the increased threshold amount for Schedule A itemized medical expense deductions, the new phase-out rules detailed in this article will dramatically impact many taxpayers. Professional tax planning may help lower your future tax liabilities.

This is why you need to contact the experienced tax law firm of Sherayzen Law Office to help you create a thorough tax plan aimed at taking advantages of the various provisions of the U.S. tax code.

IRS Announces 2014 Retirement Plan Limitations

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On October 31, 2013, the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2014. Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014.

Below is the description of the changes (or lack thereof) for some of the most common plans.

401(k), 403(b) and most 457 plans

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.

IRA Annual Contribution Limitations

The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA Contribution Limitations

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Retirement Savings Contribution Credit

The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $35,500 to $36,000; the limitation under Section 25B(b)(1)(B) is increased from $38,500 to $39,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $59,000 to $60,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $26,625 to $27,000; the limitation under Section 25B(b)(1)(B) is increased from $28,875 to $29,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $44,250 to $45,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,750 to $18,000; the limitation under Section 25B(b)(1)(B) is increased from $19,250 to $19,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $29,500 to $30,000.

Qualified Retirement and Pension Plans

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

Effective January 1, 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $205,000 to $210,000. For a participant who separated from service before January 1, 2014, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2013, by 1.0155.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2014 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $17,500.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 to $260,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $165,000 to $170,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $1,035,000 to $1,050,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $205,000 to $210,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $115,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $380,000 to $385,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,000.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $17,500.

The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $100,000 to $105,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $205,000 to $210,000.

 Various Income Limitations

The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2014 are as follows:

The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $95,000 to $96,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $59,000 to $60,000. The applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $178,000 to $181,000.

The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $178,000 to $181,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $112,000 to $114,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under Section 430(c)(2)(D) has been made is increased from $1,066,000 to $1,084,000.