Posted tagged ‘QuickBooks’

IRS Not Suited for Certifying Tax Software Privacy, Accuracy, ETAAC Says

June 25, 2010

The Internal Revenue Service should not be forced into the “ill suited” role of certifying and enforcing privacy and accuracy standards for tax software providers, but should turn instead to established outside providers for those services, members of an Electronic Tax Administration Advisory Committee (ETAAC) said June 16.

Industry advisers presented their 2010 ETAAC recommendations to Congress to IRS officials, and also made a special report on a new subcommittee formed to address e-file security and tax software policies and programs. The report is expected to be released June 17.

This year’s annual recommendations focus on tax preparer e-filing, business systems modernization, the IRS return preparer review, and new information reporting requirements.

The push to certify that tax software is accurate is coming from a number of different directions, ETAAC Chairman Phillip Poirier, a vice president in Intuit’s consumer tax group, said. The Government Accountability Office has recommended that IRS do a risk assessment of the reliability, security, accuracy, and privacy of tax software.

“Software is a term that is too narrow,” he said. “It’s really all the pipes to get the return from the preparer or the taxpayer to the IRS e-file system.” To that end, IRS has included software in its return preparer review, commenced a tax software risk assessment, and formed an ETAAC subcommittee.

That subcommittee’s principal spokesman, Dave Olsen, said tax software certifications should not be left up to the IRS. “Effective and efficient oversight should not be attempted by trying to force the IRS into what may be ill-suited roles, by making them the direct certifier or enforcer of some of these requirements; but rather it would make sense to rely on third-party certification processes and standards-setting that can be applied in that broader context across the different portions of the industry,” Olsen, director of product management with CCH Small Firm Services, said.

Olsen told BNA that IRS has an interest in making sure standards are put in place for oversight and verification of IRS electronic systems that deal with transfer of tax data. These controls would deal with security and privacy. Oversight and verification of tax software will be necessary to address accuracy and reliability, he said. However, IRS is not the appropriate agent to create these measures, he said. “It does not have the resources or the expertise.”

The standards should be established by a self-regulatory organization with third parties being brought in to review the controls that have been put in place, he said.

Olsen also said there needs to be a full understanding of the differences between professional and self-preparer software. “Professionals do things differently than a self-preparer does,” he said.

Information Reporting

Some stakeholders have recommended accelerating Form 1099 information return reporting, but ETAAC said it has some concerns with that.

The IRS needs to consider the full impact of accelerated information reporting on both businesses and taxpayers, especially small- and medium-sized businesses, said Grant DeMeritte, tax compliance manager with Howard Hughes Medical Institute.

Beginning in 2012, businesses will be required to use Form 1099 to report to the IRS all payments to corporations in excess of $600 for goods or services, not just services and supplies, which had previously been the case, he said.

“We want to make sure the IRS is ready to handle the significant increase in the number of e-filed information returns—and not just the number of e-filed returns, but the potential for an increase in the number of e-filers,” he said. Many businesses may exceed the 250-form threshold for having to file in this category due to the new legislation, which was an offset to a portion of the Patient Protection and Affordable Care Act ( Pub. L. No. 111-148)—a requirement from which corporations were previously exempt.

IRS Response

An IRS official responded to the ETAAC recommendations by saying she heard a consistent theme—that more and better communication is needed. “It’s so important but difficult to do well,” said Norma Brudwick, IRS deputy director for electronic tax administration and refundable credits. She also said IRS recognizes the importance of partnering with the industry, in part because of IRS’s limited resources.

Brudwick also said she was glad to hear that industry understands that IRS is willing to make allowances for taxpayers that do not want to e-file. “We need to really always keep in mind the taxpayer,” she said.

Gustavo A Viera CPA

CPA in Miami Since 1983

www.vieracpa.com

del.icio.us Stumbleupon Technorati Digg

Say Goodbye to Checks – Peer-to Peer Payments Gain Momentum

June 25, 2010

Small business owners and their customers no longer have to rely on checks to make and accept payments thanks to new peer-to-peer payment services cropping up.

Peer-to-peer payment services, which are being offered from a slew of banks, lets business owners transfer money to a customers’ accounts or vice versa using just an e-mail address or mobile phone number.

Users can conduct the transaction from their existing bank account, which means they won’t have to visit a different Web site to access the service.

“Billions of dollars are transferred back and forth from one business to another via check,” said Steve Shaw, Internet banking and electronic payments group director at Brookfield, Wisc.-based Fiserv (FISV), which later this month will launch ZashPay, its P2P transfer service.

Shaw said more consumers and businesses are looking for ways to make payments sans the check as their comfort level with conducting financial transactions online grows.  “Either the check is put in the mail or handed to someone. It takes time and effort [to cash the check].”

According to Javelin Research, nearly 44% or 38 million of the 86 million online households made at least one online P2P fund transfer in 2009, up from 27% in 2008. Javelin is forecasting 60 million American households will use P2P transfers by 2014. The oldest and most popular form of P2P payments comes via PayPal. With the new services, however, the customer will be able to make the payment through an existing bank account.

Fiserv’s product, dubbed ZashPay, will launch in late June with 100 banks committed to offering the service with more being added each week.

If a bank is offering the service, the business owner would login to the bank account, input an email address and send a message to the recipient and transfer the money. The service lets you make transfers online or via a browser-enabled mobile phone.

The recipient would then login to claim the money, which would automatically be deposited into the account as soon as the next day.

If the banks for the payee and the person receiving the money don’t offer the service, Fiserv is launching a public web site atwww.zashpay.com where after signing up, people can transfer money back and forth. The banks determine the fee the sender of the money has to pay with a suggested fee of 50 cents. ZashPay.com will charge $0.75 for each payment initiated at the site.

The service is just as secure as the existing bill pay service offered by Fiserv thanks to fraud tools built in to ensure the payment is coming from a valid e-mail address and going to a verified location. If a red flag arises, the payment won’t be sent.

For small business owners and their customers P2P lending may be attractive because they will no longer have to write a check, buy a stamp, mail it and then wait for the check to clear.  Shaw noted small businesses can use it as a way to manage and reconcile invoices.

“It helps from a convenience and speed perspective because they can reconcile more accounts,” said Shaw.

Fiserv with ZashPay isn’t the only financial company launching P2P payment services. CashEdge of New York has its Popmoney P2P payment service and in May announced Bank of the West is using the service.

Like ZashPay, Popmoney lets bank customers send money from their bank account using a recipients email address, mobile phone number or bank account information.  Intuit has its PaymentNetwork service that charges small businesses 50 cents per payment received. Like the other services with PaymentNetwork the small business would receive payments from anyone with an email address with the funds directly transferred into the small businesses bank account.  Among the banks offering P2P payment services are PNC (PNC)  and Wells Fargo (WFC), to name a couple.

Gustavo A Viera CPA

CPA in Miami Since 1983

www.vieracpa.com

Certified Public Accountants, the Preferred Financial Planner

June 25, 2010

The time has come to take stock of the options that Certified Public Accountants (CPAs) have for their clients’ financial planning needs. Whether it is incorporating a financial-planning practice in a firm, partnering with a Miami CPA financial planner or referring business to a Miami CPA financial planner, never has there been a greater number of resources and guidance to help the Miami CPA firm develop an additional service line, the sole practitioner to develop a new practice for the benefit of clients and colleagues or for CPAs to cultivate relationships with CPA financial planners to work with the CPA, PFS to help ensure that their client is well cared for.

Many thousands of Miami CPA’s and across the United States practice financial planning, a profession with many facets. For years, members of the accounting profession have taken tepid steps forward only to step back to evaluate what may be appropriate for the firm and for their suite of services provided. Recognition of barriers is the important first step to the integration of financial planning into an additional practice line within the firm. A greater focus should be examined on what is making CPAs overwhelmingly successful with their clients; the holistic approach that CPAs across America take when engaging with clients. The anecdotal evidence points to the clients of CPAs being in far better shape than most as it applies to their clients’ finances. When it comes to barriers, one key obstacle is a lingering discomfort with the misinformed notion that CPAs would recommend specific product. Others are more fundamental. There may be a cultural clash within firms between the profession of financial planning and the more traditional services. During the ramp-up years, there is a feeling that the financial-planning practice is being subsidized due to the revenue streams achieving insufficient results when compared to traditional lines of the practice; usually for the first five years. When the building of the practice is complete, the CPA financial planner enjoys a significantly greater revenue stream and the work hours may not match the other areas of traditional practice.

In addition, others may find it difficult to distinguish the profession of CPA financial planning from the financial services industry. In fact, the very possibility of a loss in a portfolio increases trepidation. While many non-CPA financial planners have a primary focus on investments, there are key aspects that separate CPAs from the financial services industry, including the deep tax knowledge they bring to the table, the holistic approach of covering all elements of a client’s financial plan as well as a high standard of care. There has been talk of how the fiduciary standards may not be applied to certain financial planners and exempting some relationships from fiduciary standards that focus on one or two areas of financial planning. The discussion among CPA, PFS financial planners is not how to escape fiduciary responsibilities with their client, but rather questioning the appropriateness of escaping fiduciary responsibility in financial planning, even if only a couple of the elements of the financial planning process are engaged.

Regardless of how we feel about the investment side of planning, the reality is that markets rise and fall and that most money is made in a down market, which is counterintuitive. If we lose a fraction of what the S&P 500 loses, then we don’t have to come back nearly as much and can give significant benefits to our clients on the rebound. The 58 percent market drop this last time around requires a greater than 100 percent return to get back to even. CPAs in financial planning understand what risk is, how to explain it to clients and help clients assess their risk and position assets that are consistent with their risk tolerance.

Make no mistake about it. There are plenty of balanced portfolios that have similar risk characteristics to being fully invested in the stock market. I would suggest that any CPA who does not currently have a professional relationship with a CPA, PFS (Personal Financial Specialist) to pick up the phone and have a CPA, PFS financial planner explain why financial planning is based on the very powerful questions identifying what the client’s mission, values and goals are before they recommend specific strategies and products in all aspects of planning. To find a PFS in your neighborhood, go to http://www.findapfs.com. For investments, spend some time with a CPA, PFS to discuss risk, portfolio volatility and the steps the CPA, PFS goes through to ensure that clients are well positioned to weather any economic storm. Any perception of similarity between CPA financial planners and the financial services industry is not only incongruent with reality, it could very well invalidate in excess of 100 percent of the benefit clients derive from your tax-and-accounting expertise. The comparison is similar to CPA tax preparers and enrolled agents. While we would all agree that enrolled agents provide important and valuable services to society and recognize that some enrolled agents can stand shoulder to shoulder with CPAs preparing taxes, generally there is a significant additional benefit that CPA tax preparers bring to their clients.

Given the markets that have always been volatile throughout American history (Table 2), clients cannot afford to risk working with those who consistently demonstrate a heavy bias toward firm products that vanish into the haze after they post inferior results. While it is recognized that across America firms provide some very important products, CPAs apply analytical tools and due diligence to evaluate specific investment options to ensure that the client receives service in an unbiased and objective environment. As I travel across America, I have borne witness to CPA, PFS after CPA, PFS who delivered dynamically different results from their non-CPA peers. This is not to say that there aren’t any extraordinary non-CPA financial planning practitioners, because there are. However, on the whole, the CPA, PFS has a background and experience that is significantly more beneficial to clients than the non-CPA financial planners.

CPAs tend to focus on a variety of issues and take time to explain the most critical areas of investment planning. Just three technical areas discussed involve risk and the specific dollar impact that ups and downs can have on a portfolio with 95 percent confidence, what makes a good long-term investment and set the table on how money grows over time (the power of compounding) This is a brief sample of just one area of financial planning.

If firms recalibrate their perspective toward financial planning, it will come with the recognition that it is a terrific time for accounting firms to evaluate and add financial services as an additional service line for clients or when a conflict arises, to work with other CPA firms to work together in an environment to deliver superior planning services to their clients.

Gustavo A Viera CPA

CPA in Miami Since 1983

www.vieracpa.com

Worried About Retirement? Not so Much…

June 22, 2010

While there is no shortage of research on preparing for retirement, Rappaport maintains “actuaries are the people that have focused on post-retirement, what happens when you actually retire.”

Actuaries focus on things like, how to protect yourself from outliving your assets and how what happens if you need long-term care. Rappaport refers to these as “life risks,” adding, “It’s easy to not think about them until they happen to you.”

As in 2007, the latest SOA poll found the top three concerns about retirement, shared by pre-retirees and retirees alike- remain: inflation, paying for health care and running out of money. The main difference in the 2010 survey is inflation bumped health care to claim the No. 1 spot.

What is more worrisome, the survey shows we’re not making use of strategies and tools to reduce these risks.

According to the SOA survey, the most common steps we’re taking to protect ourselves from retirement worries No.1 (inflation) and No.3 (depleting our resources) are: paying down consumer debt, saving more, and reducing our spending. While all are worthwhile goals, they boil down to the same thing: increasing the size of our retirement nest egg.

Not one takes into consideration the possibility that a major expense such as a long-term illness, could seriously deplete that nest egg, leaving the retiree in dire financial straits.

Buying an annuity or purchasing long-term care insurance don’t even make it onto the radar screens of half of us, although those still in the workforce are much more likely to say they are at least thinking about these options.

Rappaport has an additional suggestion to pad your retirement fund: work a few years longer. “If you can retire three years later… you could be considerably better off,” she says. Those extra years for your pension, 401(k) and Social Security benefits are less years of income you have to provide for yourself. You’ll also save money if you receive health insurance through your employer during that time.

Widowhood, especially for women, is another issue Rappaport feels people aren’t giving enough attention. The latest SOA survey asked participants if they thought they’d be better or worse off financially if their spouse died. About 60% of both pre-retirees and retirees responded their situation would be “about the same.”

But Rappaport points out, in reality, “women are the ones who are usually the survivors and a lot really are worse off.”

A potential solution: second-to-die life insurance.

The latest survey  also found a drop in the number of individuals who are “very worried” about paying for long-term care. Although Medicare covers some of the costs of hospitalization, there is no government insurance to help pay for an extended stay in a nursing home, a situation that goes hand-in-hand with our increased longevity.

“I don’t know why people are not more concerned about long-term care than health care,” says Rappaport.

A potential solution: long-term care insurance.

Last, but certainly not least, Rappaport worries about people’s lack of long-term planning.

When making important financial decisions, most retirees say they look just five years into the future. For pre-retirees it’s 10 years. Both ignore the fact that retirement can easily last 30 or more years.

Perhaps the scariest finding of the SOA research is that the majority of both pre-retirees (64%) and retirees (54%) believe that if someone manages their finances well during the first three years of retirement, they’ll never run out of money!  On the one hand, this suggests that we recognize the devastating impact a bear market can have if it coincides with the start of your retirement withdrawals.

However, if the past decade is any indication, over a 30-year retirement you’re likely to run into six bear markets.  Should one bad market cycle coincide with large out-of-pocket medical expenses, it can drastically reduce your standard of living- and increase the chances you will exhaust your savings- if your primary source of retirement income is your investment portfolio.

But you know who slept like a baby through the gut-wrenching markets of 2008?  The retiree with an annuity that kept paying a steady monthly income, regardless where the S&P 500 stood.And don’t forget the widow who nursed her husband through the three-year illness that nearly wiped out their savings, but was just replenished by his life insurance policy.

You get the point.  been a rough couple of years: the worst bear market since the 1930s, a mortgage meltdown and high unemployment. But they’ve all had little, if any, impact on Americans’ concerns aboutretirement.

The latest survey by the Society of Actuaries [SOA] found no significant change in consumers’ outlook on retirement since the last one was conducted in 2007.

“What surprised us tremendously is that things didn’t change more,” says actuary Anna Rappaport, who chaired the survey.

“We were expecting to see significant changes in risk perception…[that] because of the difficult economy people would tell us they are more concerned about [financial] risks.”

Are we shell-shocked? Numb? In our post-9/11 world, have we simply become inured to unpredictable negative events- be it a terrorist attack, a sharp financial setback, or a natural disaster? Have we reached the point where we hopelessly resign ourselves to fate and conclude, “What will be will be, there’s nothing I can do about it?”

Gustavo A Viera CPA

CPA in Miami Since 1983

www.vieracp.com

Do Americans Pay Too Much in Taxes?

June 22, 2010

Nobody likes paying taxes, but it’s the only way to pay for those basic government services that everyone agrees are necessary, such as defense. There is no agreement, however, on a host of other government services that push up spending, which means there is no consensus on how high taxes need to be. In fact, the Tea Party movement grew out of a sense that taxes are too high. “Tea” is actually an acronym for Taxed Enough Already.

But are we?

Historically, taxes are actually fairly low as a percentage of personal income, according to the Bureau of Economic Analysis, and as a percentage of GDP, according to the Organization of Economic Development. They’re also low in comparison with the rest of the world. Of 30 developed countries across the world, including all of western Europe plus South Korea, Canada, Mexico, Japan and a handful of eastern European countries, the U.S. ranks fifth lowest measuring as a percentage of GDP. And that includes state and local taxes plus payroll taxes for unemployment, etc., as well as federal income taxes.

Though 2006 is the latest year for which data are available, the rankings don’t shift much from year to year — just one or two spots.

Which raises the opposite question: Are U.S. taxes too low? Should they be raised to help close the budget deficit?

Not necessarily. Keep in mind that low taxes typically correlate well with high productivity gains. Ireland, Poland, South Korea and Slovakia, for example, enjoyed strong growth in labor productivity in the last expansion. All have subpar tax burdens. So higher taxes could have a negative effect on productivity, which would slow growth.

It’s something to think about as Congress searches for tax hikes in order to offset spending and reduce the deficit.

Gustavo A Viera CPA

CPA in Miami Since 1983

www.vieracpa.com

del.icio.us Stumbleupon Technorati Digg

House Votes to Eliminate Tax Break

June 22, 2010

The House passed a bill on Friday that would end a tax break for executives of investment funds, leaving hedge funds, private equity firms and venture capitalists scrambling to ease the effects of the bill before it is taken up by the Senate next month, The New York Times’s David Kocieniewski reported.

The measure was part of a broader tax bill, passed by a vote of 215 to 204, that would extend benefits for unemployed people. It seeks to change the tax treatment of “carried interest,” which is the portion of a fund’s investment gains taken by fund managers as compensation.

Under current rules, carried interest is taxed federally at a rate of 15 percent because it is treated as a capital gain. That contrasts with the tax rate on ordinary income, which can be as high as 35 percent.

The plan approved by the House, which overcame strong lobbying pressure from Wall Street, amounted to a compromise that would tax 75 percent of carried interest as ordinary income and 25 percent as capital gains. It is expected to raise more than $17 billion in tax revenue over the next decade.

Although similar attempts to increase taxes on carried interest have died in the Senate for three consecutive years, concerns about the nation’s billowing debt are so great that Senate leaders say they expect to pass a measure resembling the one approved by the House.

That has left lobbyists for fund managers searching for ways to mitigate the tax increase. In fact, in the hours before the House vote, opponents of the measure managed to postpone the date it took effect until Jan. 1, 2011. In the coming weeks, they hope to persuade lawmakers to have the tax increase phased in over several years and have a lower percentage of carried interest considered as ordinary income.

Douglas Lowenstein, president of the Private Equity Council, said he and other lobbyists were also trying to scale back a provision in the bill affecting what they call the “enterprise tax.” That provision would require the founders of hedge funds to pay ordinary income tax rates on proceeds they received from selling their firms.

“If you sell a building, a bond, or a business, you are taxed for capital gains in this country,” said Pam Olson, a former Treasury official who now represents the private equity industry. “This would make us the only business in America denied capital gains treatment, which is discriminatory and unfair.”

The protracted fight over carried interest underscores the difficulty Congress faces in trying to close tax loopholes for businesses, even at a time of sprawling budget deficits and widespread public dismay about Wall Street’s influence in Washington.

Fund mangers are typically paid a 2 percent management fee plus 20 percent of any profit they generate, the portion known as carried interest. Because their compensation is based on investment performance, they have argued that that money should be taxed at the lower capital gains rate.

But Victor Fleischer, the University of Colorado professor whose paper on the subject helped prompt Congress to act, said that carried interest should not qualify as capital gains because fund managers risk mostly other people’s money rather than their own. “They’re being paid a fee for a service, so it’s fair that they would pay the same rates as others who perform services,” Mr. Fleischer said.

As recently as January, the prospect of any change in taxes on carried interest appeared remote. Senate leaders had privately assured fund managers that if they needed revenue to pay for a package of tax breaks for certain industries, including wool production and publishing, they would close a loophole that lumber companies had used to claim billions of dollars in clean energy credits.

But in March, two factors changed. First, Representative Sander M. Levin, Democrat of Michigan, who had long championed the tax change for carried interest, became chairman of the Ways and Means committee, which writes tax policy.

Then Congress closed the lumber industry loophole in an effort to provide financial support for President Obama’s health care bill.

As the Senate Democrats sent signs that they were open to a tax increase, investors and their lobbyists mobilized quickly, warning that the proposal could stifle investments that create jobs.

A group of 80 venture capitalists traveled to Boston to urge Senator John Kerry and Representative Barney Frank, Democrats of Massachusetts, to exclude their business from the tax change, according to Jeffrey Bussgang, a partner at the Boston venture capital firm Flybridge Capital Partners.

The Real Estate Roundtable also tried to negotiate an exemption for real estate investment trusts, arguing that the higher tax rates would hurt the recovery of the real estate market.

Robert L. Johnson, founder of the Black Entertainment Television, said the tax change would inadvertently squeeze out minority entrepreneurs because, he contends, they rely heavily on start-up financing from venture capital and private equity firms.

“This legislation would cause a rapid decline in minority private equity firms and possibly eliminate minority participation in this important financial sector of the American economy,” he said.

By early this week, Congressional leaders had agreed to reject exemptions for any type of investment fund.

“This is an issue of fundamental fairness,” Mr. Levin said in a conference call on Tuesday.

During floor debate Friday, carried interest received little mention, except from several Republicans who warned that a tax increase for fund managers would slow the economic recovery.

“This is not a time to raise taxes on investments in business. That’s a sure way to kill jobs,” said Representative Lee Terry, Republican of Nebraska.

As the bill moves to the Senate, lobbyists say they are focusing on a handful of Democrats — including Robert Menendez of New Jersey, Maria Cantwell of Washington and the chairman of the budget committee, Kent Conrad of North Dakota — to reach a further compromise that would lessen the sting of the change. One proposal would lower the amount subject to ordinary rates to 60 percent, from 75 percent.

Mr. Lowenstein of the Private Equity Council said he was encouraged by some of the last-minute changes made this week, before Congress breaks for a weeklong recess, and hoped to further lessen the impact.

“We will press our case during the recess and hope to build support for an outcome that is pro growth and advances the recovery,” he said.

Gustavo A Viera CPA

CPA in Miami Since 1983

www.vieracpa.com

June 18, 2010

(Wall Street Journal) The health-care bill that Congress passed in March contained two surprising new taxes to help pay for the changes: an extra 0.9% levy on wages for couples earning more than $250,000 ($200,000 for singles) and a new 3.8% tax on investment income on those same people (technically, people with “adjusted gross incomes” above those amounts).

Each tax signals a radical change in policy. For workers, the extra 0.9% levy puts a progressive element in what used to be a totally flat tax. The 3.8% tax on investment income also knocks down a longstanding wall by applying a “payroll” tax to unearned income. Until now, FICA taxes for Social Security and Medicare have applied only to wages, not investment income.

While many details remain unclear and the Internal Revenue Service hasn’t issued any guidance, here are preliminary answers to the most important questions taxpayers are asking.

These taxes take effect in 2013, two elections away. Might they be repealed first?

Not likely. “Congress would have to undo the health reform, and budget constraints would still be there,” says Clint Stretch of Deloitte Tax. “Even if Republicans take control of Congress, President Obama holds the veto pen until Jan. 20, 2013.”

How does the 0.9% tax work?

If Joe and Mary each earn $175,000, their total employment income is $350,000. Currently they owe 1.45% — $5,075 — of regular Medicare tax, and their employers owe a matching amount. In 2013, the couple will owe an extra 0.9% — $900 — on their wages above $250,000, which is $100,000. Their employers pay nothing extra.

What about the 3.8% tax on net investment income?

This levy is keyed to “modified adjusted gross income,” with a threshold of $250,000 for couples and $200,000 for singles. (This is simply adjusted gross income for nearly everybody except expatriates, who must add back certain exclusions.) The tax is a flat 3.8% on investment income above the threshold.

How would this work?

Example 1: John and Jane, a married couple, have $400,000 of AGI — $200,000 of wages plus $200,000 of investment income. Because they have $150,000 of investment income above the $250,000 threshold, they would owe an extra $5,700.

Example 2: Anne, a single filer, earns $40,000 but has an investment windfall of $190,000, for total income of $230,000. Because she has investment income of $30,000 above her $200,000 threshold, she would owe $1,140 of additional tax.

Example 3: Retirees Mary and Bill have no wages but they do have a taxable IRA payout of $90,000, plus investment income of $150,000, for a total of $240,000. They don’t owe the new tax, because they have no investment income above the $250,000 threshold.

What is investment income?

Interest, except municipal-bond interest; dividends; rents; royalties; and capital gains on the sales of financial instruments like stocks and bonds. The taxable portion of insurance annuity payouts also counts, unless it is from a company pension. So do gains from financial trading, as well as passive income from rents and businesses you don’t participate in. All are subject to the 3.8% tax on amounts above the $250,000 or $200,000 threshold, as described above.

Not taxed: Distributions from regular and Roth IRAs and other retirement accounts, including pensions and Social Security, and annuities that are part of a retirement plan. Life-insurance proceeds, muni-bond interest and veterans’ benefits don’t count, nor does income from a business you participate in, such as a Subchapter S or partnership.

Could the 3.8% tax apply to gains on the sale of a home?

Yes, if there is a taxable gain above the $500,000 ($250,000, single) exclusion for gains on the sale of your residence.

Example: Fred and Fran, who bought their home in a New York suburb for $50,000 in 1972, sell it in 2013 for $1 million. After subtracting the $50,000 cost and $500,000 exclusion, they have investment income of $450,000. If they also have a taxable IRA payout of $70,000 and a pension of $30,000, they would owe the tax of $11,400 on $300,000.

What happens if a taxpayer who owes the new tax on investments also has a large itemized deduction — say, medical expenses or a theft loss?

Even if taxable income is zero because of deductions, he or she could still owe the 3.8% tax. Example: Myra is a single filer with investment income of $100,000 and wages of $200,000. But during the same year she loses $300,000 in a Ponzi scheme. She pays no income tax, but she still owes the new Medicare tax of $3,800 on her net investment income, says Sharon Kreider, a tax expert in Sunnyvale, Calif.

Does the 3.8% tax affect trusts and estates?

Yes, and it can hit them hard. The tax is levied on investment income as low as $12,000 that isn’t paid out to beneficiaries. Some believe the tax may also hit children’s unearned income subject to the “kiddie tax” if the parents owe it themselves.

What professions are able to avoid this tax?

Ms. Kreider and others see a sweet spot for real-estate professionals. The law deems their rents to be “active” income, so they wouldn’t be subject to the investment tax. Often they don’t owe self-employment taxes on that rental income, either.

What steps do experts recommend to minimize these taxes, other than taking capital gains before 2013 or buying municipal bonds?

• Examine both your regular and investment income: the higher your regular AGI, the more likely that your investment income will be subject to the new tax. So while Social Security and pensions don’t count as investment income, they raise AGI. This makes Roth IRA conversions even more attractive for many. “Roth withdrawals don’t raise AGI and aren’t investment income,” says Vern Hoven, a tax expert in Gig Harbor, Wash.

• Reconsider a defined-benefit pension if you’re eligible — say, you’re in a small business or have consulting income, says Mark Nash of PricewaterhouseCoopers. Pension payouts don’t count as investment income, and the older a taxpayer is, the more he can contribute.

• Taxpayers selling assets should consider installment sales, says Ms. Kreider, if spreading out the income would minimize the new tax.

• For some, life insurance may become more attractive. Because life-insurance proceeds at death aren’t subject to this tax, a taxpayer could buy a policy, borrow from it and settle up at death, avoiding income tax on investment gains within the policy. But Mr. Nash cautions that the savings must outweigh the fees and other disadvantages such policies may have.

Gustavo  A Viera CPA

CPA in Miami Since 1983

www.vieracpa.com

del.icio.us Stumbleupon Technorati Digg