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False internet rumors about “real estate transaction tax” worry taxpayers

August 11, 2012 Posted by Tasha Helms
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This article is taken from the Journal of Accountancy.

False internet rumors about “real estate transaction tax” worry taxpayers

By Jack Hagel and Alistair M. Nevis J.D. | July 30′ 2012

The National Association of Realtors has some tax advice for users of the internet: Don’t believe everything you read.

There has been a recent flare-up of chain emails purporting that, come Jan. 1, all real estate transactions will be subject to a 3.8% federal sales tax. The problem: That’s not true.

“This is grossly inaccurate,” said Stephanie Singer, a spokeswoman for the Washington-based Realtors association. “It’s not a sales tax on all properties.” 

The basis for the rumors is the new 3.8% Medicare tax on unearned income, which will take effect next year (Sec. 1411). That provision provides the rumors with a kernel of truth: A very small number of taxpayers will pay a surtax on gain from the sale of a principal residence. The new tax will only apply to single taxpayers with a modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers with a MAGI in excess of $250,000 if filing a joint return, or $125,000 if filing a separate return. Those taxpayers will pay the tax on gain from sale of a principal residence, but only on the amount of gain that exceeds the thresholds in Sec. 121 ($250,000 for single taxpayers; $500,000 for joint returns).  

False rumors about a wider-reaching real-estate tax began to find their way to inboxes in 2010, when Congress passed sweeping health care reform legislation (the Patient Protection and Affordable Care Act, P.L. 111-148, and the Health Care and Education Reconciliation Act of 2010, P.L. 111-152)—the same legislation opponents have dubbed  “Obamacare”—which was the genesis of the Medicare tax.

Since June, when the U.S. Supreme Court upheld the legislation, there has been another spike in email-rumor activity, said Singer, who noted that the Realtor association does not have a position on the legislation.

As a result of the rumors, tax practitioners have been getting questions from concerned clients. The first thing for practitioners to convey to clients is that the “real estate sales tax”—at least, the version described in some emails—is largely a hoax. Practitioners should then be prepared to explain the facts:

The new tax would only apply to single taxpayers with a modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers with a MAGI in excess of $250,000 if filing a joint return, or $125,000 if filing a separate return.
The tax is equal to 3.8% of the lesser of the taxpayers’ “net investment income” or the amount by which their MAGI exceeds the threshold amount.
Under Sec. 1411(c)(1)(iii), net gain attributable to the disposition of property (other than property held in an active trade or business) is subject to this tax. That means taxable gain on the sale of a personal residence in excess of the Sec. 121 exclusion amount would be included. Sec. 121 provides that taxpayers may exclude up to $250,000 ($500,000 for joint returns) from the gain on the sale or exchange of a principal residence provided they meet certain ownership and use requirements.
Only taxpayers with MAGI over $200,000 (or $250,000 if married filing jointly) who sell their principal residence and realize more than $250,000 in gain ($500,000 if married filing jointly) will be subject to the 3.8% tax and only on the amount of gain they realize over the Sec. 121 threshold (and on their other net investment income).

Example: A married couple with MAGI of $325,000 purchased a home in California many years ago for $350,000 and sold it this year for $900,000, realizing a gain of $550,000. After excluding $500,000 gain under Sec. 121, they are left with $50,000 investment income (assume they have no other investment income). Since their AGI is $75,000 over the tax’s threshold amount for married taxpayers filing jointly, the lesser amount of $50,000 would be subject to taxation. At 3.8% they would owe $1,900.

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Energy credits are still available to homeowners

November 30, 2011 Posted by Tasha Helms
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Homeowners can still make energy-saving home improvements and qualify for either of two energy tax credits. The Nonbusiness Energy Property Credit can benefit homeowners who install energy efficient improvements such as insulation and new windows and furnaces. The Residential Energy Efficient Property Credit is aimed at encouraging investment in alternative energy equipment. Eligible homeowners can use Form 5695, Residential Energy Credits, to claim the credits on their 2011 tax returns. For more information, contact your CPA before year-end.

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There’s still time to reduce your AGI for 2011

October 16, 2011 Posted by Tasha Helms
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Many tax breaks, like tax credits, deductions and other tax benefits, are reduced or even eliminated if your adjusted gross income (AGI), or modified AGI exceed certain thresholds. The year-end is approaching quickly and those of you who otherwise qualify for these tax breaks should consider modifying or reducing your 2011 AGI. Here are some key tax breaks that may be limited by AGI thresholds.

  • Up to $4,000 deduction for qualified higher education expenses paid.
  • Nondeductible Roth IRA contributions.
  • Deductible contributions to traditional IRAs by those who are active participants in an employer-sponsored retirement plan.
  • Deductible contributions to traditional IRAs if you are married and not an active plan participant but your spouse is.
  • $1,ooo child tax credit for children under age 17.
  • American Opportunity Credit (formerly the Hope Credit) and the Lifetime Learning Credit for higher education expenses at accredited post-secondary education institutions.
  • Up to a $2,500 deduction for interest paid on qualified education loans.
  • Contributions (up to $2,500 annually) to a tax-exempt Coverdell Education Savings Account (CESA) for an individual under age 18.
  • Tax-free break on U.S. savings bonds redeemed to pay qualified higher education expenses.
  • Credit for qualified adoption expenses.
  • A limited offset of non-passive income against passive losses for an active participation rental real estate activity.

Other key items affected by AGI levels are miscellaneous itemized deductions, Social Security benefit taxation, medical expense deduction and non-business casualty loss deduction.

Contact your tax professional regarding the details of these tax breaks and how reducing your AGI levels may benefit you.

Stay tuned for some techniques that may assist in keeping your AGI levels below relevant phase-out thresholds and potentially reduce your income tax burden.

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Income Tax Extension Deadlines Just Around the Corner

September 8, 2011 Posted by Tasha Helms
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If you or your business requested the automatic 6-month (5-month, for partnerships and trust/estates) extension of time to file your income tax returns that deadline is rapidly approaching.

The final deadline for Corporations, Partnerships and Trust & Estate Income Tax Returns is September 15, 2011 if an extension was requested. And for those individual filers the final deadline is October 17, 2011 (with extension).

So if you haven’t pulled together your tax information yet, now is the time. Contact your CPA today to assist you in preparing your income tax returns and meet those final deadlines.

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Substantiating Charitable Contributions

July 25, 2011 Posted by Tasha Helms
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As we approach year-end, many of us may need to catch up on our charitable contributions for a number of reasons in addition to a tax break. So, let’s briefly review the IRS rules on deducting charitable contributions.

A donor will not be allowed any deduction for a contribution by cash or check, or any other monetary gift, regardless of the amount unless the donor retains either:

  1. a bank record that supports the donation or
  2. a written receipt or communication from the charity showing the name of the organization, date, and amount of the contribution.

 

Property donations valued at less than $250 must be substantiated by a written receipt or letter from the charitable organization showing the organization’s name, the date and place of the contribution, and a detailed description of the property. Donors must also obtain a written acknowledgment from the charity if the value of the contribution (in cash or other property) is $250 or more – a canceled check or other reliable records are not sufficient proof.

Please contact us if you have questions about substantiating charitable contributions.

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