IRS increases standard deduction, personal exemption and lifetime estate tax exemption

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The IRS has announced its annual cost-of-living and inflation adjustments for 2015, offering taxpayers a bigger standard deduction, personal exemption, and lifetime gift and estate tax exclusion.

Tax laws require the IRS to adjust the dollar amounts of dozens of tax provisions each year to account for inflation. Rev. Proc. 2014-61 adjusts the tax brackets with an approximate inflation rate of just 1.7%. The top rate bracket, which was set at $400,000 for singles and $450,000 for joint filers in the 2013 fiscal cliff tax deal, will begin at $413,200 and $464,850 in 2015. The lifetime exclusion from gift and estate tax increases by $900,000, to $5.43 million. The $2,500 cap on flexible spending accounts that took effect in 2013 is adjusted for the first time, to $2,550.

The annual gift tax exclusion will remain at $14,000 for the third year in a row, and the 3.8% Medicare tax in net investment income (NII) is not indexed for inflation. The NII threshold will remain at $200,000 for singles and $250,000 for joint filers in 2015.

The IRS announced the adjustments for pension plans and retirement accounts in IR-2014-99 last week, and the inflation adjustments for health savings accounts (HSAs) were announced in Rev. Proc. 2014-20 earlier in the year. The Social Security Administration has also announced that the wage cap for applying Social Security tax will increase from $117,000 in 2014 to $118,500 in 2015. The following provides more information on the significant inflation adjustments.
  IRS adjustments for 2015-1
IRS adjustments for 2015-2
IRS adjustments for 2015-3
IRS adjustments for 2015-5

Key income tax adjustments

Standard deductions — The 2015 standard deductions are:

  • $12,600 (up $200) for joint filers
  • $6,300 (up $100) for single and separate filers
  • $9,250 (up $150) for heads of household
  • $1,250 (up $50) for the additional standard deduction for the aged/blind ($1,550 if also single or head of household)

Personal exemption — The 2015 personal exemption that taxpayers may claim for themselves and dependents is increased to $4,000 (up $50).

Kiddie tax — The “kiddie” tax thresholds are unchanged for 2015 and will continue to apply the following tax treatment to unearned income of a child under 18 (24 if the child is a student):
  • First $1,050 not subject to tax
  • Next $1,050 taxed at child’s rate
  • $2,100+ taxed at parent’s marginal rate

Transportation fringe benefit — The 2015 income exclusion for employer-provided transportation benefits is unchanged at $250 for parking but down to $130 for transit, because the tax provision offering equal treatment for transit benefits has expired. Congress is likely to extend this benefit as it has in past years.

PEP and Pease — The “Pease” phaseout of itemized deductions and the personal exemption phaseout (PEP) will begin at the following thresholds in 2015:
  • $154,950 (up $2,425) for separate filers
  • $258,250 (up $4,050) for single filers
  • $309,900 (up $4,850) for joint filers
  • $284,050 (up $4,400) for heads of household

Expatriation — The average annual net income tax for determining whether a taxpayer is a covered expatriate in 2015 will increase by $3,000, to $160,000. The amount that can be excluded from “gross income” for purposes of calculating the “exit tax” in 2015 will increase by $10,000, to $690,000.

Foreign income exclusion — The foreign earned income exclusion in 2015 is increased by $1,600, to $100,800.

Flexible spending account — The annual cap on flexible spending accounts increases from 2,500 to $2,550 in 2015.

Key transfer tax adjustments
Estate, gift and generation-skipping transfer tax exemption — The unified credit rises from $5.34 million in 2014 to $5.43 million in 2015.
Gift tax exclusion — The annual gift tax exclusion is unchanged at $14,000.

Key retirement plan adjustments
Qualified retirement plans — The 2015 elective contribution limits on Section 401(k) and Section 403(b) plans (and similar plans limited under Section 402(g)(1)) are increased to:
  • $18,000 (up $500)
  • $6,000 (up $500) for catch-up contributions for those 50 and older

IRA contribution limits — The amount taxpayers can contribute to an IRA remains unchanged in 2015 at:

  • $5,500
  • $1,000 for catch-up contributions for those 50 and older

IRA deduction limits — The 2015 phaseout ranges for the deductibility of IRA contributions are:

  • $61,000 to $71,000 (up $1,000) for single and head-of-household filers covered by workplace plans
  • $98,000 to $118,000 (up $2,000) for joint filers when a contributing spouse is covered by a workplace plan
  • $183,000 to $193,000 (up $2,000) for joint filers when the contributor’s spouse is covered by a work plan

Roth IRA income limits — The phaseouts for contributing to a Roth IRA in 2015 are:

  • $183,000 to $193,000 (up $2,000) for joint filers
  • $116,000 to $131,000 (up $2,000) for single and head-of-household filers

Pension plans — The 2015 annual benefit limit under a defined benefit plan under Section 415(b)(1)(A) will remain unchanged at $210,000. The limit for defined contribution plans under Section 415(c)(1)(A) will increase by $1,000, to $53,000.

Health savings accounts
The 2015 limits on HSA contributions are:

  • $3,350 (up $50) for self-only coverage
  • $6,650 (up $100) for family coverage

The 2015 requirements for high-deductible health plans paired with HSAs are:

  • $1,300 (up $50) minimum deductible for self-only coverage
  • $2,600 (up $100) minimum deductible for family coverage
  • $6,450 (up $100) limit on out-of pocket expenses for self-only coverage
  • $12,900 (up $200) limit on out-of- pocket expenses for family coverage

Eddie Adkins
+1 202 521 1565

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