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Important 2015 Changes in Tax Laws

Every year, changes are made to tax laws in the United States. Keeping up-to-date on these important modifications can help you stay in the loop, which in turn can help you stay on top of your financial situation and avoid any potential headaches.

Take note of these changes, which could affect you when you file your 2014 tax return:

If you have a Health Flexible Spending Account (FSA), you know that it’s a great way to save pre-tax money to put toward potential healthcare expenses. However, the funds must be used within a year, and if it doesn’t get used, you lose it. In 2013, people were allowed to roll over $500 from an FSA toward their new year plan. And now, if you carry over $500 into 2015, you will not be eligible to participate in a Health Savings Account (HSA) in 2015. (Note: This is only relevant for people with general FSAs, not specific ones such as dependent care or dental expenses.) “If you really want to set up an HSA for 2015, it may be best not to carry forward those unused FSA amounts, even if it means that you will lose them,” advises Kevin Martin, a tax attorney at The Tax Institute at H&R Block.

Pell Grants
Because colleges typically apply Pell Grants for tuition, most of the time, students will calculate the grant funds toward eligible education expenses. While that’s fine, that amount will reduce the expenses eligible to be used to claim an education credit like the American Opportunity Credit. Now, Pell Grants can be used for living expenses, whether or not the college applied the grant to tuition and other fees. The amount is also counted as taxable income. However, according to Kristin Shaw, tax expert and editor of H&R Block's blog “Block Talk,” it may be worth it for students to maximize the education credit.

Unemployment benefits
For those without a job, unemployment benefits offer assistance during the period when finding a new position. However, these unemployment benefits are taxable and reported using a W-2 and/or Form 1099-G. And recently, a U.S. Supreme Court ruled in favor that all supplemental unemployment compensation paid by a previous employer to a laid-off employee will be taxable as wages. As a result, social security taxes will need to be withheld from them.

Foster care
In the tax sense, foster care doesn’t mean an orphan child being placed with another family. Foster care applies to you if you’re providing “non-skilled medical support services or care for a person, living in your home, who has physical, mental, or emotional issues, and you receive payments from the state or certified Medicaid provider,” says Shaw. Those payments can be excluded from your taxable income, whether or not the person is a relative.

“This new guidance from the IRS is a complete about-face from its old position,” said Lynn Ebel, a tax attorney and manager of The Tax Institute at H&R Block. “The IRS used to tax this money received for care for relatives since they couldn't possibly meet the definition under the tax-free rules of being a foster child. Now thanks to this new clarification of the definition, taxpayers who care for their family members can receive the same tax-free treatment.” However, if the money is tax free, it is considered unearned income and used to compute the Earned Income Credit.

IRA rollover limits
Note: This change is for 2015 and will not affect your 2014 tax return, but will affect savings for the next year.

Effective as of January 1, 2015, you can now only make one rollover, (which is when you take funds out from one IRA, hold them for under 60 days and then deposit them into a different IRA account) within a yearlong period. Within that year, taxpayers may still make unlimited transfers from trustee to trustee.

“If you roll over more than one IRA, the withdrawals after the first will be taxed to you at regular rates, plus potentially a 10 percent early withdrawal tax,” says Shaw. “In addition, the disallowed rollover will be subject to the regular IRA contribution limits. If the rolled over amount exceeds your allowable IRA contribution, it will be treated as an excess contribution and subject to a 6 percent excise tax.”

For more information about all the new changes, talk to your CPE or stop by today and we’ll get you on the right track.

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