Taxes scheduled to increase in 2013 due to Medicare surtaxes

The new Medicare surtaxes are the culprits behind the tax increases.  The law was enacted in 2010 to help cover the cost of health care reform.  However, the new tax is effective for tax years beginning in 2013.

First Levy - A special 3.8% Medicare surtax on unearned income for single filers with modified adjusted gross income over $200,000 and joint filers above $250,000.  Modified AGI is AGI plus any excluded foreign earned income.  The surtax is imposed on the smaller of the taxpayer’s net investment income or the excess of modified AGI over the thresholds.

Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but not tax-free interest or payouts from retirement plans such as 401(k)s, IRAs, Roths, profit sharing plans and defined benefit plans.  In other words, annuity payouts from retirement plans are exempt from the Medicare surtax.

For example, a couple with $80,000 of investment income and AGI of $280,000 will pay a surtax of $1,140 (calculated by multiplying the 3.8% surtax by the $30,000 excess over $250,000).   A single taxpayer with AGI of $400,000 and $100,000 of investment income will pay an additional $3,800 (calculated by multiplying 3.8% by $100,000).

The surtax boosts the top rate on capital gains and dividends to 18.8% (the 15% nominal maximum rate expected to be in effect for 2013 plus 3.8%).  The full profit on sales of rental properties and second homes can be hit by the surtax.  Also, large taxable gains may push your income over the surtax thresholds.

Planning Ideas - consider selling highly appreciated assets in 2012 instead of 2013.  Tax-exempt bonds will become more popular with high-income investors.  Tax-free interest is exempt from the 3.8% surtax and does not affect the owner’s AGI.  Converting to a Roth this year instead of next may be advantageous.  Although payouts from IRAs are exempt from the surtax, they are taxable, therefore causing your AGI to raise and possibly triggering the surtax on your investment income after 2012.

Second Levy - A 0.9% surtax on earned income (i.e. wages and income from self-employment).  Single taxpayers will owe the extra 0.9% Medicare tax once total earnings are more than $200,000.  The threshold for married couples is over $250,000.  So the effective Medicare tax rate on earnings over the thresholds will be 3.8% (the usual 2.9% Medicare rate plus an extra 0.9%).

Navigating the constantly changing internal revenue tax code can be difficult and frustrating.  The new Medicare surtax may cause a tax consequence that can be avoided with proper planning, making 2012 an important year to make wise tax planning moves.  The professionals at Wallace Neumann & Verville, LLP are available to help you plan for the new Medicare surtax laws.

Disclaimer

New rules for deducting or capitalizing tangible property costs

The IRS has issued new regulations for determining whether amounts paid to acquire, produce, or improve tangible property may be currently deducted as business expenses or must be capitalized. The regulations will affect virtually all taxpayers that acquire, produce, or improve tangible property. Comprehensive and voluminous, the regulations virtually rewrite the rules in this area. For example, they provide detailed definitions of “materials and supplies” and “rotable and temporary spare parts.” They prescribe new rules for elective de minimis and other optional methods for handling their cost. They also have rules for differentiating between deductible repairs and capitalizable improvements, among many other items. The regulations generally are effective in tax years beginning after Dec. 31, 2011. However, to add to their complexity, some of the new rules in the regulations do not supersede prior IRS guidance.

As you make decisions regarding your fixed asset purchases or improvements, you may want to ask your Las Vegas CPAs about the tax consequences regarding these planned investments. As always, feel free to contact a professional at  Wallace Neumann & Verville, LLP  for guidance on the new rules for deducting or capitalizing tangible property costs.

Underfunded at the IRS?

The IRS has a new buyout program that encourages employees to accept early retirement.  Under the new buyout program, about 400 employees are being offered $25,000 to exit the IRS early.  This program is similar to the buyout offer that emerged last November.  The November buyout also promised $25,000 to those that accepted early retirement.

The buyout program has emerged on the heels of reports made to Congress regarding increasing workloads expected from IRS employees just as lawmakers threaten budget cuts at the IRS.   The increasing complexity of the Tax Code, frequent changes in tax laws, and demands for IRS employees to help oversee programs such as the health care reform law have placed a large strain on the Service’s resources.  Currently, it is estimated that the IRS employs approximately 100,000 employees.

For more information, read IRS Offers Early Retirement Buyouts to Employees: Accounting Today.   As always, please feel free to contact your Las Vegas CPAs if you have any questions.

New foreign asset reporting guidance on Form 8938

The IRS issued detailed guidance on the new law requiring individuals with an interest in a “specified foreign financial asset” during the tax year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as the IRS may prescribe). In addition, the IRS issued Form 8938 (Statement of Specified Foreign Financial Assets), which individual taxpayers will use starting in the 2012 tax filing season to report specified foreign financial assets for tax year 2011. The guidance consists of detailed temporary regulations. They define terms that apply for purposes of the reporting requirement; provide rules to determine if a specified individual must file a Form 8938 with their annual return; define what are specified foreign financial assets; detail what information needs to be reported; provide guidelines for valuing specified foreign financial assets; list exceptions to the reporting requirements; and describe the penalties that apply for failure to comply with the reporting requirements.

As always, feel free to contact one of the Las Vegas CPAs at Wallace Neumann & Verville, LLP for guidance regarding the new foreign asset reporting guidance.

Wallace Neumann & Verville, LLP hires an IRS Revenue Agent

Wallace Neumann & Verville, LLP (WNV) is proud to announce that we have added Romeo Razi to our team of professionals.  Romeo spent the last two and a half years working as a revenue agent for the Internal Revenue Service.   Romeo’s skill set as a revenue agent will help expand WNV’s existing IRS audit representation practice.

Romeo graduated from UNLV and earned two Bachelor of Science degrees in Computer Science and Mathematics.  Romeo also earned his Master’s of Accountancy while attending UNLV.  Romeo has also successfully passed the CPA exam and will be working on gaining his CPA credentials while he works at WNV.

If you are being audited by the IRS or have questions regarding IRS audit procedures, you may want to contact Romeo or any of the Las Vegas CPAs at Wallace Neumann & Verville, LLP.

O% Tax on Qualifying Small Business Stock

The “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010,” includes an extension of the 100% exclusion from income on gains resulting from the sale of qualifying small business stock.

The Job Creation Act of 2010 contains a provision that amends Section 1202 of the Internal Revenue Code of 1986.  The amendment temporarily permits the exclusion of 100 percent of the gain from the sale of certain “qualified small business stock” acquired after September 27, 2010 and before January 1, 2012.  The stock must be held for more than five years by a non-corporate taxpayer.

Qualifying small business stock must be acquired from a C corporation.  Gross corporate assets must not exceed $50 million.  Gains eligible for the exclusion are limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation.

Before you purchase Qualified Small Business Stock, you may want to ask your CPA about the tax consequences regarding the investment.  As always, feel free to contact a professional at  Wallace Neumann & Verville, LLP  for guidance regarding the tax consequences of investing in Qualified Small Business Stock.

The Dark Side to Commodity Investments (ETFs) – Reporting the Tax Liability

Molly, a client of mine, just sent me a great Wall Street Journal article called “Exteme Tax Frustration” and it discusses tax consequences of commodity investing specifically “exchange-traded-funds” or ETFs.  As commodity prices soar, investors are rushing into the trendy ETF investment strategies (specializing in commodities like oil, currencies and gold).

ETFs can carry potential tax pitfalls such as higher tax prep fees, different tax rates and reporting requirements in various states.  A popular ETF that I have seen on clients’ tax returns, SPDR Gold Shares, is discussed in the Wall Street Journal article:

SPDR Gold Shares, for example, holds gold bullion in a “grantor trust.” As such, profits and losses aren’t claimed by the trust but “flow through” to holders and are taxed at their income-tax rates.

There is a big difference at tax time:  While holders of gold stocks in a mutual fund would pay tax on long-term capital gains (those held longer than a year) of 15%, long-term gains for Gold Shares holders are taxed at 28% because physical gold is a “collectible.”

Most ETFs are organized as partnerships and they issue a reporting statement called a K-1.  The K-1 is like a 1099 from a traditional brokerage account received at the end of the year but much longer and complex.  CPAs interviewed by the Wall Street Journal said each K-1 from an ETF can take up to an hour to input into a tax return.  The additional time necessary to understand and report an ETF investment adds to the tax preparation bill.

The article’s advice is:

For investors in commodity ETFs, tax surprises can dent or even erase the gains you thought you got. With these new products, the old adage “know what you own” may not be enough. You also need to know what you’ll owe.

Before you invest in ETFs, you may want to ask your broker or CPA about the tax consequences and estimated tax preparation fees regarding the investment.  As always, feel free to contact a professional at  Wallace Neumann & Verville, LLP and they can help determine the tax consequence of an ETF investment.

Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts” must be received by the IRS before June 30

The due date for filing Form TD F 90-22.1 – Report of Foreign Bank and Financial Accounts (FBAR) is June 30th. The FBAR must be filed by any US person with a financial interest in or signature authority over one or more foreign financial (bank or investment) accounts where the aggregate balance exceeded $10,000 at any point during the year.

The Department of the Treasury must have received the FBAR by June 30th for it to be considered timely filed. This means if you are mailing this form you must plan accordingly. The FBAR can be filed via express mail such as FedEx and UPS, and you may also walk into any local IRS office and they will forward the FBAR to the Department of the Treasury in Detroit, MI.

June 30th, 2011 is also the filing deadline for certain prior year FBAR’s for signature authority only accounts that were previously deferred.

The penalties for willfully neglecting to file the FBAR could be the greater of $100,000 or 50% of the account balance at the time of the violation. Even without intent, the penalty for non-filing could be as high as $10,000.

So, if you think you may have a financial interest or signature authority over a foreign financial account, please contact Wallace Neumann & Verville, LLP as soon as possible.

What is your chance of being audited by the IRS?

The IRS just released the audit statistics for individuals audited in fiscal year 2010.  Overall, exam rates for individual returns rose to 1.11%.  The last time the audit rate was that high was in 1997.

If your adjusted gross income was $1 million or more, your audit rate increased to 8.36% or 1 out of every 12 returns.  Your chance for an IRS audit doubles if you had the following on your tax return:

1- Adjusted Gross Income in excess of $200,000

2- Schedule C tax returns with gross receipts of $25,000 or more

3- Earned income credit claimed on your return

The IRS continues to feast on S Corporations that pay very low salaries to owners.  Low salaries allow the bulk of the income to pass through to the owner without paying payroll taxes.  A recent case involving a CPA resulted in the district court ruling that the CPA’s salary was too low.  The CPA paid himself $25,000 in salary.  However, his S Corporation earnings were $200,000.   The court reclassified the S Corporation distributions as wages.

Business owners and individuals that keep proper records and can substantiate their deductions have little to fear regarding an IRS audit.  However, the time involved and hassle of an IRS audit can be drag.

At Wallace Neumann & Verville, LLP, we work hard to prepare your return so it is in accordance with Federal tax laws.  If you have any tax questions, please feel free to contact us.

Can the IRS require small businesses to turn over their electronic data??

A study done by the IRS 10 years ago showed that small businesses are among the largest contributors to the “tax gap,” or the amount of taxes owed but not paid because of noncompliance with tax laws.  During the 2001 tax year, the last time the agency measured the shortfall, non-farm sole-proprietor income was estimated to account for about 20% of the $345 billion gap.

With this 10 year old study as ammunition, the Internal Revenue Service is moving aggressively to collect more taxes from small businesses.  One of the strategies employed requires companies being audited to turn over exact copies of the electronic records kept in their business-software programs.  Small business owners feel that providing the electronic records could result in a fishing expedition by IRS auditors.

Last March, the AICPA wrote a letter to the IRS and suggested that companies be allowed to redact software to release only relevant data. Agents have accepted such information in the past.  Larger business with more sophisticated/expensive software are able to lock out portions of data that are not relevant to the audit scope.

Feel free to contact me at Wallace Neumann & Verville, LLP if you would like to discuss any electronic record requests from the IRS.  We are monitoring the issue and the AICPA’s attempts to limit the IRS’s access to electronic data.    If you are interested in reading more on this subject the Wall Street Journal has a great article.