2015 Gear Up 1040 Individual Tax

Transcription

1 2015 Gear Up 1040 Individual Tax Melanie Mogg CPA MelanieMogg Copyright 2009 Thomson Reuters/Gear Up. All rights reserved.

2 Today s Topics Net investment income tax (NIIT) Investment income Passive & rental activities Sale of principal residence Foreclosures and COD AMT Personal tax credits

3 Chapter 10: Net Investment Income Tax Page 141 After two tax seasons of dealing with this we might actually understand better. 3

4 2013 Statistics of Income 6.3 billion tax for.9% Medicare 2.8 million returns 16.5 billion tax for NIIT 3 million returns Averages: $2,250 for 9% Medicare $5,500 for 3.8% NIIT

5 Sample Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That's $3,800 on a $100,000 home etc. When did this happen? It's in the healthcare bill. REAL ESTATE SALES TAX TO GO INTO EFFECT 2013 (Part of HC Bill)

6 Worksheet page 141

7 3.8% NIIT Rate Applies to taxpayers with higher MAGI: Joint $250,000 Thresholds NOT indexed for inflation Head of Household $225,000 Single $200,000

8 Example 1 Page The Adams are married with MAGI of $275,000 and net investment income of $50,000. The tax is imposed on the lesser of: a.) Net investment income ($50,000) or b.) MAGI over $250,000 ($275,000-$250,000 = $25,000) The tax is $25,000 x 3.8% = $950

9 Example 2: 14 The Adams are married with MAGI of $375,000 and net investment income of $50,000. The tax is imposed on the lesser of: a.) Net investment income ($50,000) or b.) MAGI over $250,000 ($375,000-$250,000 = $125,000) The tax is $50,000 x 3.8% = $1,900

10 Example 3: 14 The Adams are married with MAGI of $1,000,000 and net investment income of $50,000. The tax is imposed on the lesser of: a.) Net investment income ($50,000) or b.) MAGI over $250,000 ($1,000,000-$250,000 = $750,000) The tax is $50,000 x 3.8% = $1,900

11 3 Buckets Analogy Bonus Wages SE Income Interest, Dividends, Rental, Passive T&B Commodities & FI SS, Retirement, UC, alimony, & non-passive T&B income or Gains & RE Professional Payroll NIIT Exempt filename 11

12 Example 2015: 14 Page 146 Bud has the following: Capital gain 10,000 Capital loss (40,000) Net loss (30,000) The net loss is limited to 3,000 for both regular and NII purposes. If Bud has $5,000 of dividend income his investment income before deductions would be $2,000.

13 Example 2016: 14 Page 146 Bud has the following in the following year: Capital gain 30,000 Capital loss c/o (27,000) Net gain 3,000 If Bud has $6,000 of dividend income his investment income before deductions would be $9,000.

14 Example: Page Heine has the following: 1231 gain 21,000 Capital loss (15,000) Net gain 6,000 Annuity income is presumed to be nonqualifying and subject to NIIT. For NIIT purposes, he is allowed to use the full 15,000 capital loss to offset the annuity.

15 Errata pages

16 S Corporation Materially participates No 3.8% on OI line 1 No 0.9% on OI Salary subject to 0.9% S Corporation Does not materially participate Subject to 3.8% on line 1 OI No 0.9% (assume no salary) Partnership/ LLC Materially participates No 3.8% on OI line 1 Subject to 0.9% on line 14 SE income Partnership/ LLC Does not materially participate Subject to 3.8% on line 1 OI No 0.9% on OI C Corporation Materially participates or not. Dividends subject to 3.8% Salary subject to 0.9%

17 Comprehensive example: 146 Page 149

18 Comprehensive example: 150 4

19 Comprehensive example: 150

20 ACA Concerns Additional Medicare Tax (earned income) AGI and MAGI have NO effect Retirement contributions have no effect S Corp has advantages here as long as reasonable wages paid.

21 ACA Concerns Net Investment Income Tax (NIIT) AGI or MAGI DO impact the assessment of this tax Retirement savings reduce AGI, reducing exposure Tax efficient investing to reduce gain recognition Muni s offer triple tax-free Roth conversions while in modest bracket reduce future exposure Like-kind exchanges, installment sales can defer NIIT

22 Chapter 11: Interest & Dividends Page 155 New investment vehicles and reporting are creating a headache for us preparers.

23 Dividend Rates 2015 Taxpayers in 15% or below: 0% Most taxpayers below threshold: same at 15% Some taxpayers with higher income: 20% - see thresholds. Joint $464,850 Head of Household $439,000 Single $413,200

24 Chapter 12: Capital Gains Page 169 Understanding how the dividend/capital gains rate is affected by deductions. 24

25 Capital Gain Rates 2015 Taxpayers in 15% or below: 0% Most taxpayers below threshold: same at 15% Some taxpayers with higher income: 20% - see thresholds. Joint $464,850 Head of Household $439,000 Single $413,200

26 High NW tax calculation 2011: Line 43 (Taxable Income) $9,007,705 Line 9b (Dividends) 2,221,956 Capital Gains 6,810,176 Qualifying D & CG $9,032,132 Taxed at zero (69,000) Taxed at 15% 8,938,705 Tax $1,340,806

27 2013 tax calculation: Line 43 (Taxable Income) $9,007,705 All QD & CG 72,500 taxed at zero 0 177,500 taxed at 15% 56, ,000 taxed at 18.8% 37,600 8,557,705 taxed at 23.8% 2,036,734 Total tax: $2,130,959

28 Increase? 2013 tax 2,130, tax 1,340,806 Increase 790, ,153 = 58.93% 1,340,806

29 Double Benefit Taxable Ord. LTCG Income Rates Rates $74,900 25% 15% 15% 0% $18,450 10% 0% 2015 Rates - MFJ

30 Double Benefit Taxable Ord. LTCG After Income Rates Rates Before $10,000 IRA $74,900 25% 15% $40,000 LTCG 15% 0% $40,000 LTCG 15% 0% 15% 0% $50,000 Ord. 15% $40,000 Ord. 15% $18,450 10% 0% 10% 10%

31 Double Benefit on lowest marginal rate: Before After C.G. 15% - 0% 15% O.I. 15% Total 30% $40,000 LTCG $50,000 Ord. 20% 15% 15% $40,000 LTCG $40,000 Ord. 15% 0% 15% 10% 10%

32 Double Benefit at highest marginal rate: C.G. 20% 15% 5% O.I. 39.6% Total 44.6%

33 2015 Projection Client is 60, a retired physician 2 million in taxable investments 1.2 million in retirement accounts Projected 2015 income: 8k interest 13k Q dividends 17k Capital gains

34 2015 Projection AGI $33,000 ID (10,000) EX ( 4,000) TI $19,000 Tax $0 How much to convert to ROTH?

35 2015 Schedule D: 171

36 Chapter 13: Passive and Rental Activities - Page 185 Passive takes on a new role with the addition of the 3.8% Medicare tax on passive trades or businesses.

37 The Tax Reform Act of 1986:

38 187

39 TC Memo page decision on a family matter. Carryback claim was over 5 million on losses generated in 2008 and carried back to Loads of family drama and accusations caused one member of the families testimony to be not credible. Ruled non-passive.

40 TC Memo Submitted 1,936 hours to employer. Submitted generic calendar in 2009 for 2008 rental activities and claimed he only worked 32 hours for his employer. We need not accept petitioner s testimony and may and do reject it because of the many indicia of unreliability.

41 TC Memo Had previously been audited on the issue of passive losses and RE professional. Submitted calendar showing hours without travel time. Travel to 12 rentals was approximately minutes. IRS refused revised log with travel time.

42 197 RE Professional & NIIT If RE professional (750 hours & 50%) AND meet safe harbor of 500+ hours in rental activities, not subject to NIIT Note: May need grouping to meet. Non-rental activity does not count.

43 NIIT Simplified Method 202 Can only use if 1. Sum of all NIIT items are < 5% of all separately stated items and total gain/ loss < 5 million or 2. Gain is less than 250,000

44 How much of the gain is 203 NII? investment income = NUMERATOR Sec items DENOMINATOR All items Regular tax gain (loss) 44

45 Page 193

46 Chapter 14: Installment Sales - Page 211 Harder than ever to make the decision to elect out when a capital gain is involved.

47 20% 91%

48 Chapter 15: Debt Forgiveness & Foreclosures - Page 219 In retrospect, I should have seen this coming. How could someone making $60,000 afford a $380,000 mortgage?

49 Loan Proceeds Theory A = L + OE (20) (20)

50 Loan Proceeds Theory A = L + OE (20) + 20

51 Form 1099-A indicates a sale: 220

52 Potential ordinary income: 220

53 Must file Form 982: 221

54 Recourse Debt 222 Purchase Cost Down Pay Mortgage $300,000 $30,000 $270,000 Surrender FMV Mortgage Balance 230,000 $260,000 Debt Discharge Debt Forgiveness Income $30,000

55 Recourse Debt 222 Purchase Cost Down Pay Mortgage $300,000 $30,000 $270,000 Surrender FMV Mortgage Balance $230,000 $260,000 Debt Discharge Deemed Sale Net Gain (Loss) Debt Forgiveness Income ($70,000) ($55,000) $30,000 Deemed Sale Loss Equals 70,000

56 Recourse Debt 222 Purchase Cost Down Pay Mortgage $300,000 $30,000 $270,000 Surrender FMV Mortgage Balance $130,000 $260,000 Debt Discharge Deemed Sale Net Gain (Loss) Debt Forgiveness Income ($170,000) ($55,000) $130,000 Deemed Sale Loss Equals 170,000

57 Nonrecourse Debt 222 Purchase Cost Down Pay Mortgage $300,000 $30,000 $270,000 Surrender FMV Mortgage Balance $230,000 $260,000 Debt Discharge Deemed Sale Net Gain (Loss) ($40,000) Debt Forgivenes s Income $0

58 Separating the tax impact: Loan Type Recourse Nonrecourse Selling price = FMV Debt forgiveness = Note - FMV Selling price = Note balance

59 223 Form 982 excluded discharges:

60 Qualified Real Property A = L + OE (20) (20)

61 Special Rules for Principal Residence 230 Qualified Principal Residence Debt excludable from income: 1. Applies to discharges for calendar years In the event the taxpayer restructures their acquisition debt or lose the residence through foreclosure or short sale

62 Chapter 16: Sale of a Principal Residence - Page 233 Now more than ever it is crucial to determine a principal residence in contrast to a residence.

63 NIIT & Residences Excludable gain is not included in NII Taxable gain is included in NII Second home gain is included in NII

64 235 Guinan Year Wisconsin Georgia Arizona 9/97-9/ /96-9/ /95-9/ /94-9/ /93-9/

65 Where Do I Live? If a taxpayer alternates between 2 properties, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence.

66 235 Guinan Year Wisconsin Georgia Arizona 9/97-9/ /96-9/ /95-9/ /94-9/ /93-9/

67 Where Did Guinan Live? Banking both Mail both Cars both Children neither state No Wisconsin Income Tax Return Driver s licenses Georgia & Arizona Lecturer at Georgia colleges

68 Example: Scott 237 Tax Basis = $280,000 Land at Conversion = 60,000 Bldg at Conversion = $200,000 $60,000 Suspended Basis = $ 20,000 $20,000 $200,000

69 Sold for a loss: Conversion value Original Cost $280,000 Conversion Value $260,000 Depreciation Taken Adjusted Basis for Gain Adjusted Basis for Loss Sale Price Realized Gain / (Loss) $16,000 $264,000 $244,000 $210,000 -$34,000 If the property is sold for a loss the basis for sale is the conversion value plus post capital expenditures

70 Sold for a gain: Original cost Original Cost $280,000 Conversion Value $260,000 Depreciation Taken $16,000 Adjusted Basis for Gain Adjusted Basis for Loss Sale Price Realized Gain / (Loss) $264,000 $244,000 $270,000 $6,000

71 Sold for in-between: Original Cost $280,000 Conversion Value $260,000 Depreciation Taken $16,000 Adjusted Basis for Gain $264,000 Adjusted Basis for Loss $244,000 Sale Price $260,000 Realized Gain / (Loss) $0 In event the gain basis produces a loss and the loss basis produces a gain ZERO gain or loss is realized.

72 Page 241 Partial Home Exclusion Change in place of employment Health reasons Unforeseen circumstances

73 Non-qualified Use

74 243 Non-qualified Use aggregate period of nonqualifying use total period of ownership

75 Conversion requires allocation: Page 243 Jeb! purchased a vacation home in January It was not rented nor used as a principal residence until he moved into the home in January January 2015 he sells the residence realizing a $120,000 gain.

76 Conversion to residence old law 2 of last 5 years used as residence? Yes Qualified for full exclusion.

77 4 years non-qualified use 243 aggregate period of nonqualifying use = 4 total period of ownership = OR 40%

78 3 years non-qualified use 243 aggregate period of nonqualifying use = 3 total period of ownership = OR 33.33%

79 2 years non-qualified use 243 aggregate period of nonqualifying use = 2 total period of ownership = OR 25%

80 1 year non-qualified use 243 aggregate period of nonqualifying use = 1 total period of ownership = OR 14.3%

81 Page 247 Comparison HECM 1. Collateral 2. No payments 3. Unlimited until I of 4 events HELOC or Loan 1. Income & credit 2. Fixed Payments req d 3. Limited term

82 The trouble with quotes on the internet is that it s difficult to determine whether or not they are genuine. - Abraham Lincoln 82

83 Personal Credits - Page 251 Expect increased scrutiny on EITC. TIGTA report August 2013 reported 21 25% error rate.

84 History of EITC Signed by Ford as part of the Tax Reduction Act of 1975 Temporary to offset SS tax and rising food and energy prices Made permanent in Expanded by Reagan as part of The Tax Reform Act of 1986

85 History of EITC The EITC was further expanded in 1990, 1993 and The American Recovery and Reinvestment Act (2009) expanded the EITC temporarily for 2 groups. Married couples and families with 3+ children. These enhancements were set to expire in 2013 but were extended through 2017 by the American Tax Relief Act of 2012.

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87 2014 Earned Income Tax Credit Parameters (Source: IRS) Filing Status No Children One Child Two Children Three or More Children Single or Head of Household Earned Income Level for Max Credit $6,480 $9,720 $13,650 $13,650 Maximum Credit $496 $3,305 $5,460 $6,143 Earned Income Level When Phase out Begins Earned Income Level When Phase-out Ends (Credit Equals Zero) $8,110 $17,830 $17,830 $17,830 $14,590 $38,511 $43,756 $46,997 Married Filing Jointly Earned Income Level for Max Credit $6,480 $9,720 $13,650 $13,650 Maximum Credit $496 $3,305 $5,460 $6,143 Earned Income Level When Phase-out Begins Earned Income Level When Phase out Ends (Credit Equals Zero) $13,540 $23,260 $23,260 $23,260 $20,020 $43,941 $49,186 $52,427 Add l Marg. Rate 7.65% 16% 21% 21% 87

88 Chapter 18: Alternative Minimum Tax - Page 263 What causes AMT? Surprisingly it is mostly a function of lowered regular tax rates, increased exemptions and personal credits.

89 AMT Exemptions Statutory S/HoH $33,750 MFJ $45,000 MFS $22, Perm S/HoH $50,600 MFJ $78,750 MFS $39,375 AMT Exemptions will now be indexed for inflation!!!! 89

90 AMT Exemptions Page 264

91 Marginal rate during phase-out: Marginal rate during exemption phase out is 35% * 28% = 35%

92 Buddy s Law: Handle every stressful situation like a dog If you can't eat it or play with it, Just pee on it and walk away

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