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A couple of years ago, writing about taxes was fun. There were deductions and exclusions, and the IRS was helpful and forgiving. No more Mr. Nice Guy. The recent investigation of the IRS by Congress seems to have swayed the IRS into punitive action. If they are getting called on the carpet for not following the exact wording of the law, then they will enforce the exact wording.

Taxpayers should therefore be aware that they need documentation like never before, and be very careful in tax preparation; do not expect compassion. For example, one of the recent court cases involved a significant donation to a church which the IRS disallowed as a deduction because the church’s letter thanking the taxpayer for the donation failed to include a statement that no services or goods were provided to the donee in exchange for the donation. The taxpayer provided a new letter from the church stating that no services or goods were provided. This was not acceptable because the letter had to be written by April 15th of the year following the donation. The deduction was denied. The IRS has also become noticeably less willing to waive penalties.

At this time of year we like to review some of the changes in the New Year (2014) from the prior year. The maximum taxable wage for social security purposes for 2014 is $117,000. Just in 2011 it was $106,800. With two intervening years it has jumped $10,200, thus costing someone with the maximum salary an additional $632.40. But really, in 2011 the Social Security deduction was only 4.2% instead of the 6.2% in 2014, so the real increase is a whopping $2,768.90. The employer has always paid the 6.2%, so the employer’s increase is the $632.40.

Maximum Contribution

A person in a profit sharing plan or a SEP can contribute a maximum of $52,000 based upon maximum eligible wages of $260,000 in years starting in 2014, contrasted with $51,000 on maximum eligible wages of $255,000 in 2013. It is notable that the maximum 401(k) contribution remains at $17,500, plus an additional $5,500 for those over age 50, unchanged from 2013. The contribution to IRAs also did not change — $5,500 maximum per year, $6,500 for those over age 50. No IRA contributions are allowed after individuals reach age 70.5 and the deduction is limited to the amount of earned income by working if that total is less than $5,500. IRA contributions for 2013 can be made until April 15, 2014.

Remember that a Roth IRA is an interesting alternative to a regular IRA for individuals in low income brackets — particularly young people — because the funds come out tax-free after age 59.5 when the individual’s income could put him or her into a higher income tax bracket.

The maximum annual amount to contribute to a Section 125 medical plan remains at $2,500. Complaints about the allowance have long been centered upon the fact that if people didn’t use their allotment, they lost their money. The company, acting as croupier, could keep the funds. The company could consider it a fee for operating the 125 plan, or, perhaps, a reduction of employee wages. For the employees, it is a form of gambling their wages against their health. The IRS has now decided to partially allow individuals to carry forward $500 of unused funds into the following year (any remainder is still forfeited). The individual can still make a contribution of up to another $2,500 into the plan for the new year, BUT all $3,000 has to be used in the second year — no carry over to a third year. You have to wonder who makes up these rules. The employee earned the money by working; why, under any conditions should he or she have to forfeit? Note that with an HSA (Health Savings Account), which can be entered into in connection with a major medical insurance policy, individuals can make tax deductible contributions until they qualify for Medicare. They can continue carrying those unused funds into retirement, paying medical expenses (such as dentists) tax free and paying tax as they withdraw funds for their general use. In theory, how is a Section 125 plan really different? Of course, since the employer is in complete control of the Section 125 funds, many firms pay a bonus to the employee equal to the forfeiture; but there is no requirement that they do so.