Affordable Care Act
An important requirement of health care reform (Affordable Care Act) for virtually all US employers is that by October 1, 2013 employers are required to provide written notice to all employees, regardless of benefit enrollment status or full vs. part time work status about the federal and state Health Insurance Marketplace (also known as “exchanges”). After October 1, 2013, employers will be required to provide the notice to new employees within 14 days of their hire date. The notice can be distributed by first class mail or electronically subject to certain requirements outlined by the Department of Labor.
We have found the Massachusetts Health Connector website to be of help to Massachusetts employers. The forms available on the Health Connector site apply to Massachusetts residents and the options available to them for insurance plans. You can use either the Massachusetts notice or the DOL notice to comply with the mandate. Employers need to fill in some information and check the appropriate boxes before distributing to employees.
The DOL version is available at http://www.dol.gov/ebsa/healthreform/
The Massachusetts version is available at t www.Mahealthconnector.org
We encourage everyone to visit either of these sites for information pertaining to the ACA.
The federal website www.Healthcare.gov is a source of additional information regarding health insurance plans that will be available beginning October 1, 2013.
The American Taxpayer Relief Act of 2013
June , 2012
Tax Law Provisions - Existing and New
Through the end of this year, the so-called Bush tax cuts are locked in place. However, unless Congress takes action and the president approves (whoever he happens to be at the time), individual federal income tax rates will increase in 2013. We at R.J. Gold & Company thought it would be helpful to bring you up to date on what is currently scheduled to happen to high-income individuals. Although this memo is longer than we would like to send out – there is a lot to cover and provide to you previously not seen in one place. The definition of “high income” does have different definitions under various provisions, so please read carefully.
For 2013 and beyond, the top two rates on ordinary income, including net short-term capital gains, will increase to 36% and 39.6% (up from 33% and 35%, respectively).
For 2013 and beyond, high-income individuals may also be hit with an additional 0.9% Medicare tax on part of their wages and self-employment income. However, the additional 0.9% tax was part of the 2010 Healthcare legislation, which is now under review by the Supreme Court.
● For 2013 and beyond, the maximum rate on most long-term capital gains will increase to 20% (up from 15%). However, an 18% maximum rate will apply to most long-term gains from selling assets that are: (1) acquired after 12/31/2000 and (2) held for more than five years.
● For 2013 and beyond, dividends will be taxed at ordinary income rates, which could be as high as 39.6% (up from 15%).
● For 2013 and beyond, high-income individuals may also be hit with an additional 3.8% Medicare contribution tax on all or part of their net investment income, which is defined to include long-term gains and dividends. However, the additional 3.8% tax was part of the 2010 Healthcare legislation, which is now under review by the Supreme Court.
● For 2013 and beyond, the phase-out rules for personal and dependent exemption deductions and itemized deductions are scheduled to return with full force. These disguised tax increases will raise effective tax rates on investment income of higher-income individuals just that much higher.
● For 2013 the threshold for the itemized deduction for unreimbursed medical expenses is scheduled to be increased from 7.5% of AGI to 10% of AGI for regular tax purposes. The increase would be waived for individuals age 65 and older for tax years 2013 through 2016.
It’s certainly possible that none of the aforementioned tax increases will actually come to pass. However the prudent thing to do is plan for all of this to become effective as planned. Our best guess is that we will see some tax revenue increase provisions – the question is what will the final provisions be.
Details on Additional 3.8% Medicare Contribution Tax on Investment Income
For 2012, a 2.9% Medicare tax applies to salary and self-employment (SE) income. For an employee, 1.45% is withheld from his or her paychecks, and the other 1.45% is paid by the employer. A self-employed person pays the whole 2.9%. Investment income is not subject to the existing 2.9% Medicare tax.
Starting in 2013 (which will be here before we know it), all or part of a high-income individual’s net investment income will get socked with an additional 3.8% “Medicare contribution tax” unless our Washington politicians take action.
Net Investment Income Defined. Net investment income for purposes of the additional 3.8% Medicare contribution tax is the sum of:
1. Net gain from property held for investment.
2. Gross income from dividends.
3. Gross income from interest.
4. Gross income from royalties.
5. Gross income from annuities.
6. Gross income from rents.
7. Gross income from passive business activities.
8. Gross income from the business of trading in financial instruments or commodities.
Minus deductions that are properly allocable to these income categories.
Exception for Business Activities: Income from categories 1–6 is generally not taken into account for purposes of the additional 3.8% Medicare contribution tax if the income is from a business activity.
Exception to the Exception: Income from categories 1–6 is taken into account if it is from a passive business activity or the business of trading in financial instruments or commodities. For example, net gains from selling passive rental properties could apparently be hit with the additional 3.8% Medicare contribution tax, and so could net gains from selling passive partnership interests and passive investments in S corporation stock.
Exception for Distributions from Tax-favored Retirement Plans: Net investment income for purposes of the additional 3.8% Medicare contribution tax does not include distributions from tax-favored retirement plans and accounts described in IRC Secs. 401(a) (qualified retirement plans), 403(a), 403(b), 408 (traditional IRAs), 408A (Roth IRAs), and 457(b).
Income Threshold and Tax Base. The additional 3.8% Medicare contribution tax will not apply unless Modified Adjusted Gross Income (MAGI) exceeds: (1) $200,000 for an unmarried individual, (2) $250,000 for a married joint-filing couple, or (3) $125,000 for those who use married filing separate status. These MAGI thresholds are not adjusted for inflation. MAGI means regular AGI plus the excess of the amount excluded from gross income under the IRC Sec. 911(a)(1) foreign earned income exclusion over any deductions or exclusions that are disallowed under IRC Sec. 911(b)(6) with respect to such excluded foreign earned income.
The additional 3.8% Medicare contribution tax will only apply to the lesser of: (1) net investment income or (2) the amount of MAGI in excess of the applicable threshold.
Trust Income Can Also Be Affected. For a trust, the additional 3.8% Medicare contribution tax will apply to the lesser of: (1) undistributed net investment income or (2) the amount of AGI in excess of the threshold for the top trust federal income tax bracket. (For 2012, that threshold is a mere $11,650.)
Tax Rate Impact. Thanks to the additional 3.8% Medicare contribution tax in conjunction with other scheduled rate increases, the following maximum federal rates will apply in 2013 unless something changes:
● 23.8% (20% + 3.8%) on net long-term gains in excess of net short-term capital losses (versus 15% for 2012).
● 23.8% (20% + 3.8%) on net Section 1231 gains from passive business activities (versus 15% for 2012).
● 43.4% (39.6% + 3.8%) on net short-term gains in excess of net long-term capital losses (versus 35% for 2012).
● 43.4% (39.6% + 3.8%) on net dividend income (versus 15% for 2012).
● 43.4% (39.6% + 3.8%) on net interest, royalty, annuity, and rental income (versus 35% for 2012).
● 43.4% (39.6% + 3.8%) on net ordinary income from passive business activities and net ordinary income from the business of trading in financial instruments or commodities (versus 35% for 2012).
Planning to Mitigate Higher Taxes on Investment Income
Investment gains that would be subject to higher tax rates if they are recognized in 2013 won’t be hit with those higher rates if the gains are recognized this year. Therefore, you should consider triggering gains by unloading affected appreciated assets by 12/31/12 instead of hanging onto them. That said, the tax tail should not wag the investment dog. You should only unload assets that you are thinking about unloading anyway.
On the other hand, holding onto depreciated investment assets (say rental real estate properties that were acquired at the top of the market) until after this year could be beneficial because losses from unloading them in 2013 and beyond could shelter clients from higher future tax rates on net investment income. Losses would reduce: (1) taxable income for regular tax rate purposes, (2) AGI for purposes of various phase-out rules, and (3) MAGI and net investment income for purposes of the additional 3.8% Medicare contribution tax.
Don’t Forget about the Other New Medicare Tax Scheduled to Take Effect Next Year
Starting with tax years beginning in 2013, an extra 0.9% Medicare tax will be charged on: (1) salary and/or SE income above $200,000 for an unmarried individual, (2) combined salary and/or SE income above $250,000 for a married joint-filing couple, and (3) salary and/or SE income above $125,000 for those who use married filing separate status. These thresholds are not adjusted for inflation.
For self-employed individuals, the additional 0.9% Medicare tax hit will come in the form of a higher SE bill. However, the additional 0.9% Medicare tax will not qualify for the above-the-line deduction for 50% of SE tax. The additional 0.9% Medicare tax must be taken into account for estimated tax payment purposes.
As we mentioned earlier, none of the aforementioned tax increases may actually come to pass. If they are cancelled, however, it would probably not happen until after the election on November 6th. While you may be well-advised to sit tight right now, you should be prepared to pull the trigger on planning moves before year-end. Stay tuned—we will update you as more happens in the months ahead.
Note: The basic content of this memo was written by Tax Action Panel member William R. Bischoff, CPA for Thomson Reuters/Practitioners Publishing Company and had been modified for the clients of R.J. Gold & Company, P.C.
Form 8925 Report of Employer-Owned Life Insurance
It has come to my attention recently that a newer and rather obscure IRS form may not be filed annually when necessary. Since January 1, 2007 the IRS has required companies to file a Form 8925 Report of Employer-Owned Life Insurance Contracts disclosing certain information about company owned life insurance policies on owners and key-employees of the company.
Under Section 101(j) of the IRC it now states that for insurance policies issued after August 17, 2006 any insurance death proceeds paid on an employer-owned life insurance contract will remain tax free* under Section 101 (a) if the statutorily prescribed notice and consent requirements are satisfied and the contract fits within one of the statutorily designated coverage conditions, which are: (i) the insured was an employee of the policy holder during the 12 month period before the insured’s death, or (ii) at the time the contract was issued the insured was a director, or a highly compensated employee or individual (as defined).
The real new issue is that the required notice and consent is in place at the time the new policy was issued. The notice and consent requirements are satisfied only if the covered employee (i) is notified in writing that the policyholder intends to insure the employee’s life and the maximum amount of insurance, (ii) provides written consent to being insured under the insurance contract and that such coverage may continue after the insured terminates employment, and (iii) is informed in writing that the policyholder will be the beneficiary of any proceeds payable upon the death of the employee.
My goal is to find out whether your company has put in place any insurance policies since August 17, 2006 that may fall under this reporting requirement. If so all may be fine in that proper notice and consent forms were executed, on a timely basis. If there were any policies that were not issued with the proper notice and consent documents being executed then we would want to assist you in communication with your insurance agents about this matter.
We are now required to advise you that any information pertaining to tax related matters contained in this communication, including any attachments, is not intended or written to be used, and it cannot be used, by any person or entity for the purpose of (a) avoiding tax penalties imposed by any governmental taxing authority or agency, or (b) promoting, marketing or recommending to another party any tax-related matters addressed herein. We will not update our advice for subsequent changes to the tax law, regulations or case law.
2011 Income Tax Update
As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2011 return and in future years. To get you started, we’ve included a few money-saving ideas here that you may want to put in action before the end of the year. Contact us if you have questions about which ideas may be appropriate for you or if you want to discuss other tax-saving strategies.
If you own rental property, you are subject to the same reporting requirements as other taxpayers engaged in a trade or business. If you made payments of $600 or more to a service provider; i.e. plumber, electrician, painter, accountant, etc. in the course of earning rental income, you are required to provide to the IRS and to the service provider a Form 1099-MISC by January 31st of the following year
If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available.
If you’re age 70˝, or older, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to a charity. Such a transfer, or a qualified charitable deduction (QCD) is not subject to income tax, but you don’t get to claim a charitable deduction on your Form 1040. However, the tax-free treatment equates to a 100% write-off, and you don’t have to itemize your deductions to get it. Be careful—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it. So, this could be your last chance.
Because of the roller-coaster stock market this year, you may have investments that are worth less than what you paid for them. If so, you may want to cut some of your losses before year-end to gain a tax benefit. Losses are normally deductible to the extent of any capital gains that you’ve realized this year, plus an additional $3,000 (or $1,500 for married individuals filing a separate return).
If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.
If it looks like you are going to owe income taxes for 2011, consider bumping up the Federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, penalties will be minimized, if not eliminated.
The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after they reach age 701/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. There’s good news for 2011 though—QCDs discussed above count as payouts for purposes of the required distribution rules. This means, you can donate all or part of your 2011 required distribution amount (up to the $100,000 limit on QCDs) and convert taxable required distributions into tax-free QCDs.
Also, if you turned age 701/2 in 2011, you can delay your 2011 required distribution to April 1, 2012 if you choose. But, waiting until 2012 will result in two distributions in 2012—the amount required for 2011 plus the amount required for 2012. While deferring income is normally a sound tax strategy, here it results in bunching income into 2012. Thus, think twice before delaying your 2011 distribution to 2012—bunching income into 2012 might throw you into a higher tax bracket or have a detrimental impact on your other tax deductions in 2012.
Again, these are just a few suggestions to get you thinking. Please call us if you’d like to know more about them or want to discuss other ideas.
December 9, 2010
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