Prepared for the New Surtax?

As part of Obama Care, we have a new tax beginning in 2013. The official name of this tax is the “Unearned Income Medicare Contribution Tax,” and even though the name implies it is a contribution, don't get the idea you deduct it as a charitable contribution. It is, in actuality, a surtax levied on the net investment income of higher-income taxpayers.

The surtax is 3.8% on the lesser of your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. MAGI is your regular AGI increased by income excluded for working out of the country; net investment income is your investment income reduced by investment expenses.

The filing status threshold amounts are:

·  $250,000 for married taxpayers filing jointly and surviving spouses.

·  $125,000 for married taxpayers filing separately.

·  $200,000 for single and head of household filers.

Example - A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer's Medicare contribution tax would be $760 ($20,000 × 3.8%).

Investment income includes:

·  Interest, dividends, annuities (but not distributions from IRAs or qualified retirement plans), and royalties,

·  Rents (other than derived from a trade or business),

·  Capital gains (other than derived from a trade or business),

·  Home sale gain in excess of the allowable home gain exclusion,

·  Your child's investment income in excess of the excludable threshold if, when eligible, you elect to include your child's investment income on your return,

·  Trade or business income that is a Sec. 469 passive activity with respect to the taxpayer, and

·  Trade or business income with respect to trading financial instruments or commodities.

Planning Note: for surtax purposes, gross income doesn't include interest on tax-exempt bonds. Thus, one can avoid the net investment income surtax by investing in tax-exempt bonds.

Investment expenses include:

·  Investment interest expense,

·  Investment advisory and brokerage fees,

·  Expenses related to rental and royalty income, and

·  State and local income taxes properly allocable to items included in Net Investment Income.

Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don't be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home gain exclusion, it will add to your income, and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock and a second home. So when planning to sell a capital asset, be sure to consider the impact of this new surtax.

The surtax also applies to undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests.

If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return.

If you have questions about this new tax or wish to do some related tax planning, please give this office a call.

CAN YOU AVOID TAXES BY ESTABLISHING AN

OFFSHORE CORPORATION?

If you are a US citizen, including foreign persons who are permanent residents in the US,  or a US corporation, establishing an offshore company will not necessary reduce you taxes and will create additional repotting requirements to the US Treasury.

All citizens of the US, including foreign persons who are permanent residents in the US, are required to pay tax on Worldwide Income.  The only way to get around this is if the offshore company’s sales are 100% from non US sources and the cash stays offshore.  In general, any deviation of this will create a US tax liability.

Regardless of the tax consequences of the above, there are reporting requirements to the US Treasury of any and all financial interest owned in foreign countries by citizens of the US, including foreign persons who are permanent residents in the US.  This is called FBAR reporting. If you need more information, please let me know

 

Si usted es ciudadano de los Estados Unidos, incluidas las personas extranjeras que son residentes permanentes en los EE.UU., o de una empresa DE LOS ESTADOS UNIDOS, establecer una compañía en el extranjero, que no es necesario reducir los impuestos y creará replantado requisitos adicionales para el Tesoro de Estados Unidos. Todos los ciudadanos de los Estados Unidos, incluyendo las personas extranjeras que son residentes permanentes en los EE.UU., están obligados a pagar impuestos sobre los ingresos provenientes de todo el mundo. La única manera de evitar esto es si las ventas de la compañía offshore son 100% de las fuentes de EE.UU. y el efectivo permanece costa afuera. En general, cualquier desviación de este modo, se creará una responsabilidad fiscal estadounidense. Independientemente de las consecuencias fiscales de lo anterior, hay requisitos de presentación de informes para el Tesoro de los EE.UU. de cualquier y todos interés financiero propiedad en países extranjeros por parte de los ciudadanos de los Estados Unidos, incluyendo las personas extranjeras que son residentes permanentes en los EE.UU. Esto se llama FBAR informes. Si necesita más información, por favor hágamelo saber

 

 

CASUALTY LOSSES EFFECTS ON TAXES

The following is a brief overview of casualty losses and how they might impact your tax return. The information provided is by no means complete; contact this office for further details.

Casualty Loss Definition - A casualty refers to the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

·    A sudden event is one that is swift, not gradual or progressive.

·    An unexpected event is one that is ordinarily unanticipated and unintended.

·    An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

Disaster Losses - Disaster losses are casualty losses that occur in a geographical area that has been declared a disaster region by the President of the United States. Generally, casualty losses must be taken in the year in which they occur. However, if the casualty occurs in a designated disaster region, the losses can be taken either in the year of the loss or in the year prior to the loss. The decision as to when to take the loss depends upon a number of factors and should be carefully analyzed in order to determine which year is most beneficial for the taxpayer. Factors to consider include:

·    The tax brackets for each year - From purely a tax standpoint, each year should be carefully examined in order to determine which will provide the greatest overall tax benefit without wasting other tax benefits.

·    The need for immediate cash - The primary purpose of the special rules allowing the casualty loss to be claimed on the prior year’s return is to provide taxpayers access to a tax refund without needing to wait - often many months -to file their return for the year of the loss.

·    Self-Employment tax - Self-employed taxpayers will also need to consider whether to take a business casualty loss that affects inventory in the current or prior year since the loss can offset the self-employment tax as well as income taxes.

·    Whether the loss will be used up - If the casualty loss is not fully used up in the year in which it is first deducted, it can create a net operating loss (NOL). An NOL can be taken back to prior years or carried forward to future years and used as a deduction on carryback or carry-forward returns. If such an NOL is considered, care should be taken to analyze the benefit from the potential loss carryback versus carrying the loss forward.

Net Operating Loss - Generally, taxpayers may carry their net operating loss back 2 years and forward 20 years until it is used up. NOLs resulting from casualties may, by election, be carried back 3 years.

Determining the Loss - Generally, the deductible loss is the lesser of the cost or fair market value of each item lost in the casualty. Once the loss is determined for each individual item, those amounts are added together to determine the total loss for each separate casualty event.

Business or Personal Casualty - Casualty losses are categorized as either business or personal casualty losses. Business losses are fully deductible without limitations, whereas personal casualty losses are first reduced by $100 for each event, after which the total of all of the events for the year is reduced by 10% of your annual income (AGI). In addition, for personal casualty losses, you must itemize your deductions in order to take advantage of the loss.

Insurance Reimbursement - Your casualty loss must be reduced by the amount of any insurance reimbursement. Generally, if you are insured for your loss and the insurance company offers you an amount that the insurance company deems to be the FMV of the item or items lost in the casualty, you will generally not have a casualty loss unless the combination of insurance loss limits and deductibles exceeds the personal loss limitations.

Filing Relief - The IRS will generally provide filing relief for affected individuals and businesses within a Presidentially declared disaster zone, including extensions for filing tax returns, entity returns, information returns, and making deposits. The duration of these extensions will vary depending on the facts and circumstances of the disaster.

For example, in the aftermath of Hurricane Sandy, the IRS extended most filing and payment deadlines that occurred in late October until February 1, 2013. The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to receive this relief.

All workers assisting with relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are generally also eligible for relief. Watch for IRS announcements related to each event.

If you have incurred a casualty or disaster loss, please contact this office so that we may provide you with guidance related to claiming and documenting your loss.