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.

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.

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.

Recently, the IRS released Rev. Rul. 2010-25 to address whether acquisition indebtedness incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence can constitute home-equity indebtedness to the extent it exceeds $1 million.  In Rev. Rul. 2010-25, the IRS ruled that a taxpayer can deduct as qualified residence interest up to $1.1 million of the debt securing the purchase of a taxpayer’s principal residence.

Rev. Rul. 2010-25 gives an example in which an unmarried individual purchases a principal residence for $1,500,000 with a cash down payment of $300,000 and a bank loan of $1,200,000 secured by the residence.  In the example, the taxpayer pays interest that accrues on the indebtedness during that year, and there is no other debt outstanding that is secured by the principal residence.  Per Rev. Rul. 2010-25, the taxpayer may deduct the interest paid on the first $1 million of the original loan balance because it is considered acquisition indebtedness under Sec. 163(h)(3)(B). Under the ruling, pursuant to Sec. 163(h)(3)(C), the taxpayer may also deduct the interest paid on $100,000 of the remaining debt of $200,000 because the first $100,000 loan amount in excess of home acquisition indebtedness is considered home-equity indebtedness. Any interest on the remaining indebtedness of $100,000 is considered nondeductible personal interest under Sec. 163(h)(1) because it cannot be traced to any source other than the personal residence, which has already reached its limits.

Rev. Rul. 2010-25 clarifies a gray area that has for years plagued many CPAs.  This ruling may allow CPAs and Taxpayers that have taken this position in the past the opportunity to sleep a little easier at night!!