Archive for the ‘Tax’ Category

New Tax On Unearned Income Starts In 2013

Posted on Tuesday, August 21st, 2012

As part of the Patient Protection and Affordable Care Act (popularly known as the “health care reform law”), an additional 3.8% tax on unearned income will apply to certain individuals.

Who’s Impacted by the 3.8% Unearned Income Tax?

Starting in 2013, the new tax, technically known as the “unearned income Medicare contribution,” applies to the net investment income of higher income individuals, trusts, and estates. For individuals, the tax is equal to 3.8% of the lesser of (1) investment income for the year or (2) the amount by which modified adjusted gross income (MAGI) exceeds the applicable threshold amount for the taxpayer’s filing status. These thresholds are:

Filing Status/Threshold Amt.*

  • Individual Taxpayers/$200,000
  • Married (Joint)/$250,000
  • Married (Separate)/ $125,000

* These amounts are not inflation-adjusted.

Example. Bill’s 2013 MAGI is $250,000, $50,000 more than the $200,000 threshold for his single filing status. His net investment income is $60,000. Bill will owe the 3.8% tax on $50,000, since that amount is less than his $60,000 net investment income.

Definition of Net Investment Income

For purposes of the new tax, “net investment income” includes gross income from interest, dividends, annuities, royalties, rents (other than rents derived from a trade or business), and net capital gain. It also includes income from “passive” trade or business activities, such as pass-through income from limited partnerships, S corporations, and limited liability companies in which a taxpayer does not materially participate. The 3.8% tax does not apply, however, to qualified retirement plan and individual retirement account distributions.

Tax Planning Strategies

Taxpayers will have to plan carefully to minimize their exposure to the new tax. Various income-timing strategies may be effective, especially if a taxpayer’s MAGI is close to the applicable threshold.

Other strategies that may be helpful include, to the extent possible, offsetting capital gains with losses in the same year or investing in municipal bonds, since tax-exempt interest won’t be included in net investment income or MAGI for purposes of this tax.

Consider, too, maximizing your pretax contributions to retirement plans or selling appreciated investments in 2012 (before the new tax takes effect) instead of 2013.

We Can Help

Taxes are only one factor to consider when weighing investment decisions. Make sure you weigh all factors applicable to you. Contact us for more information on how the new additional tax on unearned income may affect your personal situation.

New Medicare Tax Under The Healthcare Reform Law

Posted on Sunday, August 5th, 2012

The Patient Protection and Affordable Care Act (“the Act”) contains tax increases that will go into effect for tax years beginning after December 31, 2012. One such tax is an additional hospital insurance tax (“Additional Medicare Tax”) for higher-earning self-employed and working taxpayers. Recently, the IRS released guidance containing some frequently asked questions and answers that provide affected employers with the information necessary to meet new withholding requirements.

Additional Medicare Tax Liability
Under the Act, an individual is subject to an Additional Medicare Tax of 0.9% if his or her wages, other compensation, and/or self-employment income (together with those of a spouse, if filing a joint return) exceed the following threshold amounts based on the individual’s or couple’s federal income tax filing status:

Filing Status – Wage Threshold
Married, jointly – $250,000
Married, separately – $125,000
Single – $200,000
Head of Household* – $200,000
Qualifying Widow* – $200,000
*with qualifying person or dependent child

Thus, all earnings that are subject to the current 1.45% Medicare Tax are subject to the Additional Medicare Tax of 0.9% to the extent the earnings paid are in excess of the applicable threshold for the individual’s filing status. In effect, this change increases the Medicare Tax rate on those “excess” earnings from 1.45% to 2.35%.

Example: Michael, who is single, earns $220,000 in 2013 from his employer. His Medicare Tax will be $2,900 (i.e., $200,000 x 1.45%) plus $470 (i.e., $20,000 x 2.35%), for a total of $3,370.

Note that the Additional Medicare Tax only applies to the employee or self-employed person’s portion of the Medicare Tax. The employer’s portion continues to be 1.45% of earnings.

Self-employed individuals pay the Additional Medicare Tax as part of their self-employment tax liability.

Employer’s Withholding Requirement
The guidance provides that, under the Act, an employer is required to withhold the Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. This is so despite the fact that the taxpayer may not be subject to the Additional Medicare Tax (for instance, if the individual, together with her or his spouse, is not subject to the Additional Medicare Tax because their joint earnings do not exceed the $250,000 threshold applicable to married couples filing a joint return).

No Notification Required
Note that an employer is not required to notify an employee of the additional withholding requirement that may apply on account of the Additional Medicare Tax. Also, an employee may not request additional withholding specifically for the Additional Medicare Tax even if the employee expects to owe an Additional Medicare Tax liability (for example, if the individual earns less than $200,000 but, together with her or his spouse, the couple will earn more than the $250,000 joint filer threshold). An employee may, however, adjust her or his income tax withholding amount by filing a new IRS Form W-4, and any excess withholding will be applied toward the individual’s overall federal tax liability, including the Additional Medicare Tax.

We Can Help
We can provide employers with information and guidance with respect to the collection of the Additional Medicare Tax. Contact us today.

2012 MIDYEAR TAX PLANNING – Retirement Savings Plan

Posted on Monday, July 2nd, 2012

If you are contributing to a retirement plan at work, such as a 401(k) plan or 403(b) tax sheltered annuity, try to take full advantage of the tax benefits offered. The money you contribute in 2012 is not included in your taxable income for the year, so not only does contributing to your plan let you accumulate savings on a tax-deferred basis, but it will also allow you to reduce the income tax you currently pay. In any event, try to make enough of a contribution to secure the maximum employer matching contribution.

If you have a traditional IRA or Roth IRA, you have until the tax filing date in 2013 to make a contribution for 2012 of up to $5,000 to your account, or $6,000 if you’re age 50 or older. Check with us for eligibility requirements and other important tax considerations.

Self-employed business owners who do not already have a tax-deferred retirement plan should consider starting one before year-end 2012. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE plan. We would be happy to discuss the advantages and restrictions of each type.

We Can Help

We can provide you with personal and business tax planning assistance — now or in the coming months. Call us at 1-800-269-6466 for an appointment to review your specific situation.

2012 MIDYEAR TAX PLANNING – Itemized Deductions

Posted on Saturday, June 30th, 2012

If you expect to itemize your deductions on your 2012 return, you will need to consider whether to pay optional deductible expenses before the end of the year to lower your 2012 taxes or wait to pay them in 2013. Remember to factor in the scheduled higher rates for 2013 (and the potentially higher benefit you would get from deductions in a higher-rate environment) as opposed to the potential phaseout of certain deductions in 2013.

If you believe accelerating deductions into 2012 is your best course of action, consider the following:

Deductible interest. Consider making your January 2013 mortgage payment (which includes December’s interest) in late December 2012, so that the interest will be deductible on your 2012 return.

Medical and miscellaneous itemized expenses. Your deductions are limited to the amounts that exceed 7.5% of AGI for medical expenses and 2% of AGI for miscellaneous expenses. Bunching two years of your or your family’s unreimbursed medical or miscellaneous itemized expenses (such as certain job-related expenses and investment expenses) into one tax year may allow you to surpass the deduction floors and help you gain a deduction for part of your expenses. Bear in mind that the floor limit relating to medical-expense deductions will generally increase to 10% of AGI in 2013, absent further legislation.

Charitable contributions. Contributions charged on your credit card in 2012 count as 2012 deductions, even if you don’t receive or pay the credit card bill until 2013.

Taxes. If you pay quarterly estimated state income taxes, consider paying your last 2012 estimate before December 31, so that it will be deductible on this year’s tax return. Employees who have state income taxes withheld from their pay may wish to increase the amount withheld from their remaining 2012 paychecks to cover any projected underpayment.

We Can Help

We can provide you with personal and business tax planning assistance — now or in the coming months. Call us at 1-800-269-6466 for an appointment to review your specific situation.

2012 MIDYEAR TAX PLANNING – Avoid Estimated Payment Penalties

Posted on Thursday, June 28th, 2012

At this time of the year, it is also prudent for you to check your income-tax withholding payments. Failure to satisfy the withholding rules can result in a tax penalty when you file your return.

Note that, if you receive significant income from sources other than your job, or if you are self-employed, you may be required to make quarterly estimated tax payments directly to the government.

Your total payments in tax withholding from your paycheck and estimated tax payments you send to the IRS over the course of the year should typically be at least 90% of your 2012 federal tax liability. Or, you can base your payments on the taxes you paid for 2011.

  • •    If your adjusted gross income (AGI) in 2011 was $150,000 or less ($75,000 AGI or less for married persons filing separate returns), this alternative requires a 2012 payment of 100% of your 2011 tax liability.
  • •    If your 2011 AGI was over $150,000 ($75,000), this alternative requires a payment for 2012 of 110% of your 2011 tax.

If you fail to meet these payment rules, the IRS may charge you a penalty, unless the final tax payment owed on your tax return is less than $1,000.

Example: Assume you will incur 2012 federal income taxes of $50,000. For 2011, assume your taxes were $40,000. To avoid a penalty, you must pay 2012 withholding and/or estimated taxes of: (1) 90% of your 2012 tax (or $45,000); or (2) if your AGI in 2011 was $150,000 or less ($75,000 or less if you were a married-separate filer), 100% of 2011’s tax (or $40,000); or (3) if your 2011 AGI was more than $150,000 ($75,000 as a married-separate filer), 110% of your 2011 tax (or $44,000).

We Can Help

We can provide you with personal and business tax planning assistance — now or in the coming months. Call us at 1-800-269-6466 for an appointment to review your specific situation.

2012 MIDYEAR TAX PLANNING – Start Planning Now

Posted on Tuesday, June 26th, 2012

Midyear may not seem like “tax season,” but now is an ideal time to assess your tax situation and to identify and implement appropriate planning strategies. Current federal tax law provides many opportunities for certain taxpayers to reduce their tax bills for 2012. However, a number of favorable measures are scheduled to expire at year- end, so careful planning for the balance of the year is prudent.

Start Planning Now
In light of certain potentially expiring tax provisions, planning ahead can be especially important if you expect to earn more income this year than last year. Furthermore, there may be certain income that you choose to accelerate into 2012 — as opposed to postponing to 2013 when tax rates may be significantly higher. It’s smart to prepare a taxable income projection for the year, including the income you expect to receive through the remainder of 2012 and the tax deductions that you may be entitled to claim. Once your taxable income for 2012 is projected, an estimate of your 2012 tax bill can be calculated using the current tax rate schedule. You can then compare that to an alternate scenario should certain taxable income be included in 2013, as opposed to 2012.

Consider Potentially Expiring Provisions
Many currently favorable federal tax provisions will expire at the end of 2012, absent further legislative actions. Changing provisions that may have an adverse impact on your 2013 tax liability include the following:

Individual tax rates. Current ordinary rates of 10%, 15%, 25%, 28%, 33%, and 35% may be increased to 15%, 28%, 31%, 36%, and 39.6%, beginning in 2013.

Long-term capital gains rates. In 2012, the maximum long-term capital gains rate is 15%. The maximum capital gains rate is scheduled to increase to 20% in 2013.

Qualified dividend rates. While qualified dividends are taxed at 15% in 2012, dividends are scheduled to be taxed as ordinary income beginning in 2013.

Payroll taxes. For the balance of 2012 only, employees pay a 4.2% Social Security tax rate on wages up to $110,100 (the 2012 Social Security Wage Base), as opposed to the normal 6.2% rate. Similarly, current law reduces the tax rate for the Social Security portion of self-employment tax on self-employment net earnings up to $110,100.

Accordingly, the maximum savings for employees and self-employed individuals in 2012 will be $2,202 (i.e., 2% of $110,100). For spouses who both earn at least as much as the Social Security Wage Base in 2012, the maximum savings will be $4,404.

The above Social Security/self-employment tax rates are scheduled to return to the full 6.2% in 2013. The resulting increased Social Security tax liability should be factored into your overall planning.

Personal exemptions and itemized deductions phaseouts. For 2012, no income-based phaseouts of these thresholds apply. Next year, prior law income limits will be restored, resulting in a lower amount of exemptions and itemized deductions that may be claimed by higher income individuals.

We Can Help

We can provide you with personal and business tax planning assistance — now or in the coming months. Call us, 1-800-269-6466 for an appointment to review your specific situation.

These potentially expiring provisions (and this is only a partial list; many other scheduled 2013 tax law changes may affect your overall tax liability) – and the likely resulting consequences – should be considered as tax planning steps are taken during the balance of 2012.

Middle Class Tax Relief And Job Creation Act Of 2012

Posted on Sunday, February 26th, 2012

The Middle Class Tax Relief and Job Creation Act of 2012 (the “Act”) was signed into law on February 22, 2012. The legislation extends, through the end of 2012, the two percentage point payroll tax cut for employees and self-employed individuals that had been in place for 2011 and the first two months of 2012.

Background

As part of an economic stimulus law, the Social Security payroll tax for 2011 was reduced by two percentage points, from 6.2% to 4.2%. A similar reduction was applied to the self-employment tax for self-employed individuals. At the end of last year, those payroll and self-employment tax cuts were extended for two months, through February 2012.

Payroll Tax Cut Extended Through 2012

For the balance of 2012 only, employees will continue to pay a 4.2% Social Security tax rate on wages up to $110,100 (the 2012 Social Security Wage Base). Similarly, the Act reduces the tax rate for the Social Security portion of self-employment tax on self-employment net earnings up to $110,100.

Therefore, the maximum savings for employees and self-employed individuals in 2012 will be $2,202 (i.e., 2% of $110,100). For spouses who both earn at least as much as the Social Security Wage Base in 2012, the maximum savings will be $4,404.

Note that employers continue to pay the full employer portion of Social Security taxes for their employees.

Call Us

We can help you determine how the extension affects you or your business. Contact us at 800-269-6466.