2014 tax news you can use

(Chelsea Update would like to thank Len Pytlak, CPA, for the information in this column. Pytlak is entering his 35^th tax season and his 23^rd year as an independent business owner. His office is located at 180 Little Lake Dr. Suite 3 in Scio Township.  If you are looking for an accountant, please call him at 663-1313.)

Here are a few things you will want to know for 2014 and your taxes.

If you happen to be one of the higher income wage earners, and those wages exceed the annual social security limit, that limit is going up this year.

• The wage limit subject to the 6.2 percent social security tax has gone up to $117,000 from $113,700. Once your wages exceed this amount for the year, your take home pay will increase by 6.2 percent until January of 2015 when the limit will go up again.

The start of a new tax year usually also involves changes in a lot of dollar limits for such things as IRA and 401K contributions, but not this year.

• If you participate in a 401K retirement plan at work, the maximum that you can put into that fund out of your wages remains at $17,500 unless you happen to be age 50 or over. In that case, you can contribute an additional $5,500.

• In some cases your employer may offer a SIMPLE type retirement account. The dollar limits for this type of plan remains at $12,000 for those under age 50 with an additional $2,500 for those 50 and over.

• If you contribute to an IRA, those limits also remain the same as they were for 2012. The limit is $5,500 plus $1,000—more if you’re 50 or older.

• Contributions to 401K and SIMPLE plans reduce your taxable income, and in most cases, your employer also makes a contribution into your retirement plan. Contributions to a IRA may or may not reduce your taxable income and are your employer does not make any contribution into that account. So if you have a choice, do the 401K or SIMPLE contribution before making the IRA contribution, at least up to the amount that your employer will match.

• If you happen to have a health savings account, also known as an HSA, that contribution limit has gone up slightly to $3,300 for an individual plan and $6,550 for a family plan.

• If you are a teacher who has been taking the $250 deduction on the front page of your federal tax return for supplies used in the classroom, there is a very good chance that this deduction will not be extended for 2014 returns.

One last thing. I frequently get asked what’s the difference between a tax credit and a tax deduction.

A tax credit reduces your total tax liability dollar for dollar, while a tax deduction reduces your taxable income dollar for dollar. A tax deduction will only save you a percentage of your taxes depending on the tax bracket you happen to be in.

For example, if you are in the 25-percent tax bracket a $250 deduction will save you $62.50 ($250 x 25 percent) in taxes; while a $250 tax credit will save you $250 in taxes.

Keep this relationship in mind when someone tells you it is tax deductible, that it will not be a dollar for dollar savings.

(Publisher’s note: Len Pytak has been my accountant for 14 years.)