Rev. Proc. 2013-35 - Inflation adjustments for 2014; pension plan adjustments 

October 31: The IRS today released an advance copy of Rev. Proc. 2013-35, which provides the dollar amounts for a variety of tax provisions adjusted for inflation for 2014.

In a separate release (IR-2013-86, October 31, 2013), the IRS announced the cost-of-living adjustments to dollar limitations that will apply for pension plans for 2014. These items are described at the end of this report.

Inflation adjustments for 2014—items of interest to exempt organizations

Rev. Proc. 2013-35 [PDF 59 KB] provides:

  • The exemption of annual dues to be paid by a member to an agricultural or horticultural organization will be $158 (up from $155).
  • For purposes of defining the term “unrelated trade or business,” the unrelated business income of certain exempt organizations will not include a “low cost article” of $10.40 or less.
  • The $5, $25, and $50 guidelines for disregarding insubstantial benefits received by a donor in return for a fully deductible charitable contribution under section 170, as set forth in Rev. Proc. 90-12 (as amplified by Rev. Proc. 92-49, and modified by Rev. Proc. 92-102) will be $10.40, $52, and $104, respectively.
  • For tax years beginning in 2014, the annual per person, family, or entity limitation to qualify for the reporting exception for nondeductible lobbying expenses under section 6033(e)(3) will be $110 or less.

Individual income tax amounts to increase for 2014

A related IRS release—IR-2013-87 [PDF 33 KB]—explains that:

  • The tax rate of 39.6% affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10%, 15%, 25%, 28%, 33%, and 35% – and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.
  • The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
  • The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)
  • The alternative minimum tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).

2014 inflation adjustments—items of general interest

According to Rev. Proc. 2013-35, for tax year 2014:

  • The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
  • The dollar limitation on voluntary employee salary reductions (which is now indexed for inflation) for contributions to health flexible spending arrangements (FSAs) remains at $2,500 for 2014.
  • The annual deductible amounts for Medical Savings Accounts (MSAs) for 2014 increase as shown in the table below:

Medical Savings Accounts (MSAs) Self-only coverage Family coverage
Minimum annual deductible $2,200 $4,350
Maximum annual deductible $3,250 $6,550
Maximum annual out-of-pocket expenses $4,350 $8,000

Source: Rev. Proc. 2013-35

Estate and gift tax amounts

For an estate of any decedent dying during calendar year 2014, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,090,000 (up from $1,070,000 for 2013).

The annual exclusion for gifts remains at $14,000.

Rev. Proc. 2013-35 will appear in Internal Revenue Bulletin 2013-47, dated November 18, 2013.

Pension plan limitation adjustments for 2014

Another related IRS release—IR-2013-86 [PDF 42 KB]—provides the cost-of-living adjustments to dollar limitations that will apply for pension plans for 2014 as:

  • Participants in most employer-sponsored 401(k) plans and 403(b) plans for employees of public schools and certain tax-exempt organizations can contribute up to $17,500 (which is the same as for 2013). Individuals, age 50 or over, can make an additional contribution of up to $5,500 (which is the same as for 2013).
  • The annual contribution limit for most defined contribution plans is increased to $52,000 (up from $51,000 for 2013).
  • The contribution amount allowed for Roth IRAs will begin to phase out for married taxpayers filing a joint return with incomes exceeding $181,000 (up from $178,000 in 2013) and $114,000 (up from $112,000 for 2013) for single taxpayers and heads of household.
  • For contributions to a traditional IRA, the deduction phase-out range for an individual covered by a retirement plan at work is increased to $96,000-$116,000 (up from $95,000-$115,000 for 2013) for joint filers, and the range is increased to $60,000-$70,000 (up from $59,000-$69,000 for 2013) for a single person or head of household.

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