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

Last year, I wrote about the debut of IRS2Go, the first smartphone app from the IRS.  Yesterday, the IRS announced the release of version 2.0 of the app.  The new version includes tools to watch IRS YouTube videos, order tax return transcripts, and get the latest news from the IRS.

If you have a portable device with either the Apple or Android platforms, the IRS app may be the easiest and most convenient way to check the status of your refund.  If you want to maximize your tax refund and take advantage of every deduction that is legally allowed, please contact a Las Vegas CPA from Wallace Neumann & Verville, LLP.

The real estate market crash has been brutal to Las Vegas homeowners who have become underwater with their mortgages or have lost their homes through foreclosures and short sales.  For others who are more fortunate, the low housing prices in Las Vegas have provided them with the opportunity to purchase their first primary residence or investment property.  First-time homeowners and real estate investors who previously prepared their own tax returns may suddenly find themselves overwhelmed and may seek the help of a CPA.  Some of the accounting and tax challenges that real estate owners face are:

• Correctly reporting amounts on the settlement statement.  Also known as a HUD-1 or closing statement, this is the document usually printed on legal-size paper that shows the purchase price of a home and all of the costs incurred at closing.  Some amounts on the settlement statement may be deductible in the year you purchase your home.  Other items are added to the basis of the property, potentially providing a depreciation deduction or reducing the amount of tax you will need to pay when you sell your home.  In some cases, amounts may be amortized and deducted over the life of the loan.
• Classifying real estate activities on a tax return.  If you rent out a home, is it considered a passive activity for tax purposes?  Do you qualify as a real estate professional and are therefore able to take advantage of special tax breaks?  Are you involved enough in real estate activities to have the money you make from flipping homes subject to self-employment tax?  There are many questions that your CPA can help answer.
• Determining whether certain costs are repairs or improvements.  Many of the best deals for real estate in Las Vegas are foreclosures, but some of these homes require significant repairs or improvements.  For example, you may have to replace a water heater, put in new carpet, or hire a painter.  Are these costs deductible repairs or depreciable improvements?
• Bookkeeping for multiple real estate investments.  If you own several rental homes and manage them yourself, you’ll want to make sure you are well-organized for tax time.  Some real estate investors use QuickBooks, a popular accounting software, to keep track of income and expenses for various rental properties.  A QuickBooks feature called “classes” allows a rental property owner to run profit and loss statements for several different properties within a single data file.  Other real estate investors have separate bank accounts for each property or use other methods to successfully do the bookkeeping for multiple investments.

If you have discovered accounting for real estate transactions to be a daunting task, feel free to contact me or another Las Vegas CPA from Wallace Neumann & Verville providing tax and accounting services to individuals involved in real estate.