Important Message
Important Message

Tax Changes

Federal tax legislation enacted over the past ten years has affected virtually all Americans, with major changes in income tax rates, taxes on dividends and long-term capital gains, estate taxes, retirement savings rules, and education incentives. Although many of these changes were set to sunset after 2012, most were extended or made permanent in The American Taxpayer Relief Act of 2012.

Keep in mind that federal legislation entails myriad details, and the following represents only a summary of the principal provisions. 

Reduced Income Taxes

The table below lists federal income tax rates for 2014.

Rates on Ordinary Income

Tax Rate


Married Filing Jointly


$0 - $9,075

$0 - $18,150


$9,075 - $36,900

$18,150 - $73,800


$36,900 - $89,350

$73,800 - $148,850


$89,350 - $186,350

$148,850 - $226,850


$186,350 - $405,100

$226,850 - $405,100


$405,100 - $406,750

$405,100 - $457,600


$406,750 or more

$457,600 or more


Dividends and Capital Gains

Dividend income paid by U.S. and some qualified foreign corporations is now taxed at a top rate of 20%. However, the same taxable income thresholds of $400,000/$450,000 apply when determining the rate investors will pay on long-term capital gains and dividends. Those with incomes that exceed the new limit will pay a higher 20% rate, but most others will pay a lower 15% rate.

Be aware that some types of dividend income may be taxed at ordinary rates. For example, dividends received from a REIT (real estate investment trust) may not be subject to the lower rate. Check with your tax advisor for the various types of dividend income that are exempt from the new rules.

Long-term capital gains (gains on assets held more than one year) are also taxed at a top rate of 20%, but as with qualified dividends, only taxpayers in the top bracket pay 20%; others pay a maximum rate of 15%. 

Relief for Parents and Joint Filers

married couples filing jointly with incomes of $110,000 or more.

For married couples who file jointly, the tax legislation attempted to reduce the impact of the so-called marriage penalty: a glitch in the tax rules that results in higher tax bills for some married couples than they'd face if they were single and filing separately. The 15% tax bracket for married taxpayers filing jointly was expanded so that it applies to twice as much income as for single filers. In addition, the standard deduction for joint filers was increased so that it will be double that allowed for single filers.

Alternative Minimum Tax Exemption

For married couples filing jointly, the alternative minimum tax exemption is $82,100 in 2014. For single filers, it is $52,800 in 2014.

The alternative minimum tax is a federal tax system created in 1969 to help ensure that wealthier taxpayers didn't use loopholes to completely avoid paying income taxes. But because the tax was never indexed for inflation, it has increasingly applied to less affluent households.

Retirement Savings Vehicles

A number of tax changes benefit those saving and investing for retirement, including:

Higher Contribution Limits -- The limit on annual contributions to traditional and Roth IRAs is $5,500. For certain employer-sponsored retirement plans -- including 401(k) plans -- the annual contribution limit in 2014 is $17,500. Keep in mind, however, that employers can impose contribution limits that are lower than the government maximum.

Contributing the Max

Tax Year

401(k) and 403(b) [traditional and Roth], 457 Plans





Catch-Up Provisions for Those Nearing Retirement -- Individuals aged 50 and older can take advantage of "catch up" contributions to IRAs and some qualified employer-sponsored retirement plans. For IRAs, the allowable catch-up contribution is $1,000 per year. Participants in 401(k) and certain other qualified employer-sponsored plans who are at least 50 years old are also permitted to make catch-up contributions of $5,500 in 2014 and adjusted annually for inflation thereafter. Participants in SIMPLE Plans who are aged 50 and older can make a catch-up contribution of $2,500 in 2014. Before investors can make catch-up contributions, they must first make the maximum regular contribution to their IRA or employer-sponsored plan.

Estate Taxes

For 2014, the estate tax exemption is $5.34 million and the maximum tax rate to 40%. In future years, these amounts may be indexed for inflation.

Education Incentives

Following is a summary of certain tax benefits for those saving for education. Contact your tax or financial advisor for more information concerning those provisions.

Coverdell Education Savings Accounts (formerly Education IRAs)

  • Maximum annual contributions are $2,000.
  • Qualified withdrawals are eligible to be used to fund elementary and secondary education in addition to higher education expenses.
  • Income eligibility phases out between $190,000 to $220,000.
  • The contribution deadline for Coverdells is April 15 of the following year.
  • Age limits for contributions and withdrawals don't apply to special needs beneficiaries.

529 Plans

  • Qualified distributions from 529 plans are tax free.
  • Investors may transfer assets from one 529 plan to another on behalf of the same beneficiary without paying taxes on the distribution.

Take the Next Step: Talk to a Pro

Tax legislation often takes time to sort out -- particularly when there are as many sunset rules as there are in the recent tax acts. To be sure you understand the rules and how they apply to your situation, work with your financial and tax professional.

Points to Remember

  1. Tax changes accelerate rate reductions on ordinary income. The top rate is now 39.6%.
  2. Rates on dividends paid by domestic and some qualified foreign corporations are 20% for taxpayer in the top income bracket, 15% for many others.
  3. The top tax rate on long-term capital gains is 20% for those in the top bracket, 15% for many others.
  4. The child tax credit on dependent children younger than 17 was raised to $1,000.

Related Content

Keeping Up With Your IRA: Tax Season Checklist - Article

The Alternative Minimum Tax -- Not Just for the Wealthy - Article

Five Strategies for Tax-Efficient Investing - Article




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