Eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, and identifying themselves to the IRS before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have the penalties abated. Eligible taxpayers who need more time to file their returns may receive an additional extension to October 15, 2013, by filing Form 4868 by July 15, 2013.

The DOR is extending the deadline for business entities to certify their tax status through an online application on WebFile for Business, entitled Annual Certification of Entity Tax Status, until close of business April 12, 2013.  (The filing deadline had previously been April 1^st.) The annual Corporations Book is used by local assessors to determine which businesses qualify for various property tax exemptions afforded entities that are classified as corporations for federal and state income tax purposes.

A corporation that has not completed the online application by April 12 may be omitted from the Corporations Book and may not receive personal property tax exemptions to which it would otherwise be entitled.

If you have never used WebFile for Business, you will need to register your business to access the application for certification. Please note that it takes a minimum of two days to confirm registration for WebFile for Business, and the Corporations Book Application cannot be filled in until that confirmation is received. Entities included in a combined return must separately register in WebFile for Business and separately file the entity status certification.

Note that an entity that is exempt from taxation under section 501 of the Internal Revenue Code is not considered a business corporation for purposes of local property taxation, and is thus not required to fill out the Corporations Book Application.

For details see Directive 12-5 or FAQ’s

Below, we have included some helpful information relative to your estimated tax responsibilities and how to avoid underpayment penalties.

The IRS assesses penalties for underpayment of income tax. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.

What are the requirements to avoid penalties?

The required annual payment for most individuals is the LOWER of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Can you provide some examples?
For example, if your total tax paid on the 2012 tax return was $10,000 and you are anticipating significantly higher income for 2013, the IRS is content as long as you pay in $10,000 via withholding or through even quarterly payments. Any additional balances due on the 2013 tax return will need to be paid with the 2013 filing by April 15, 2014.
Should your income decrease significantly in the subsequent year (2013), you would default to the 90% of tax shown on the current year return. By way of example, if you paid in $100,000 in tax for 2012, and you expect your income tax to be 50% less than it was in 2012, you would need to pay in 90% of $50,000 or $45,000 to avoid penalty. In this situation, we often recommend considering a tax projection to make sure you are adequately paid in.
What if I change from a salaried employee to self-employed?

This will require that you switch to quarterly estimate tax payments and adhere to the 90% current year tax or 100% of prior year tax rule as stated above.
What if I am a salaried employee and my withholdings are not adequate?

You would be subject to penalties if you do not update your W-4 kept on file by your employer. We recommend that you review and update your W-4 form. The W-4 form provides you the option to claim an additional set withholding amount over and above what they are taking. It is not uncommon to be filing Married 0 exemptions and still be short on your required payments due to other income circumstances, lack of deductions, etc. Your other alternative would be to pay in the difference via quarterly estimated tax payments.
What if your self-employment income is not steady throughout the year?

Most individuals make estimated tax payments in four installments. In other words, we determine the required annual payment, then divide that number by four and make four equal payments by the due dates. But you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and Aug., no estimated payment is required before Sept. 15. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.
Are there circumstances where the underpayment penalties do not apply?

The underpayment penalty doesn’t apply to you:

1. if the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;

2. if you were a U.S. citizen or resident for the entire preceding year, that year was 12 months, and you had no tax liability for that year;

3. if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or

4. for the fourth (Jan. 15) installment, if you aren’t a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.
Will an extension buy me some time to pay my taxes?

No. An extension of time to file a tax return is NOT an extension of time to pay the tax due under the return. You must pay in 90% of the anticipated tax come extension time to avoid penalties.
How are the penalties and interest calculated?

The addition to tax is one-half of 1% of the tax not paid, for each month (or part of the month) it remains unpaid, up to a maximum of 25%. The penalty increases to 1% per month beginning with either the 10th day after notice of levy is given or the day on which notice and demand is made. Interest on underpayments of tax is imposed at the federal short-term rate plus three percentage points. These rates are adjusted quarterly.
In addition, IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

When are the 2013 estimated tax payments due and where can I find my coupons?

Your first quarterly estimate for 2013 is due April 15^th and subsequent payments are due June 15^th, September 15^th, and January 15^th.

If your 2012 return has been filed, we have included the quarterly estimates with your tax package and have loaded the appropriate forms to your portal.   If for whatever reason, you have not received these forms or do not have a portal set-up, please contact our office and we will be happy to provide them.

Please contact us if you have any estimated tax payment questions or if your situation has changed and you need some assistance with figuring out your obligation to pay in quarterly estimates.

The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) provides benefits to homeowners like you by extending the Credit for Nonbusiness Energy Property (CNEP) for 2012 and 2013. The 2012 Taxpayer Relief Act does not modify the general requirements for the CNEP.

As you may know, the CNEP can be taken when qualified energy efficient improvements or expenditures are made for your principal residence, including new insulation; replacement windows, skylights and doors; central air conditioners; certain water heaters, furnaces or boilers; and a new metal or asphalt roof specifically treated to reduce heat loss. The CNEP, which was not available for the 2008 tax year, is extended for eligible property placed in service after December 31, 2011, and before January 1, 2014. In order to qualify for the CNEP, there must be a reasonable expectation that the qualified energy efficiency improvements will remain in use for at least five years.

For 2012 and 2013, the CNEP is equal to ten percent of qualified energy efficiency improvements installed plus qualified residential energy property expenditures. The maximum CNEP is equal to $500 after reduction by CNEP credits previously allowed after 2005.

The CNEP is often confused with the Residential Energy Efficient Property (REEP) credit, which was previously extended through 2016. Both are energy credits available to homeowners; however, the REEP credit involves expenditures for solar electric property; solar water heating property; fuel cell power plants; small wind energy property; and geothermal heat pump property.

Please do not hesitate to contact us should you have any questions regarding the residential energy credit or any other provision from the 2012 American Taxpayer Relief Act.

 We are highlighting some of the business provisions included in the 2012 American Taxpayer Relief Act which was put in place on January 1, 2013. The new law includes some valuable business tax incentives.  Many of these business tax incentives are temporary so taxpayers have a limited window in which to maximize their potential tax savings. 

 Tax Rates

 Depending on how a business activity is structured, it may be taxed as a corporation or its owners may pay taxes at the individual rates. The American Taxpayer Relief Act permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000.  Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds, which will be adjusted for inflation after 2013, are also used to determine the point at which the maximum tax rate on capital gains and dividends for an individual rises from 15 percent to 20 percent.

 Bonus Depreciation

 Bonus depreciation is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available but was reduced to 50 percent.  The American Taxpayer Relief Act extends 50 percent bonus depreciation through 2013 (through 2014 in the case of certain period production property and transportation property). The American Taxpayer Relief Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.

 While not quite as attractive as 100 percent bonus depreciation, 50 percent bonus depreciation is valuable.  For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $60,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” accelerated depreciation, taking into account a half-year convention.

 Bonus depreciation also relates to the vehicle depreciation dollar limits under Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year.  Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.

 Bonus depreciation, unlike Code Sec. 179 expensing (discussed below), is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation.  Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.

 Expensing

 The American Taxpayer Relief Act enhances or extends several expensing provisions. These include Code Sec. 179 small business expensing, 15-year recovery period for qualified leasehold and retail improvements and restaurant property, special expensing rules for film and television productions, and a seven-year recovery for motorsports complexes.

 Code Sec. 179 expensing.  In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses.  For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. The American Taxpayer Relief Act boosts the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. Keep in mind that the increase is temporary.  The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013.  The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014.  Additionally, the American Taxpayer Relief Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.

 Leasehold, retail and restaurant property.  The American Taxpayer Relief Act extends for 2012 and 2013 the special treatment of qualified leasehold and retail improvement property and qualified restaurant property as eligible for a 15-year recovery period. Otherwise, this property generally is depreciated over a 39-year recovery period.  To take advantage of this enhanced expensing, the qualified property must be placed in service before January 1, 2014.

 Film and television.  A special expensing rule allows taxpayers to elect to deduct certain costs of a qualified film or television production in the year the costs are paid or incurred. The American Taxpayer Relief Act extends this rule through 2013.

 Motorsports property.  Qualified motorsports complexes may be eligible for a seven-year straight line cost recovery period. The American Taxpayer Relief Act extends this treatment through 2013.

 Work Opportunity Tax Credit

 The WOTC expired after 2011 with an exception for employers that hire qualified veterans. The American Taxpayer Relief Act extends the WOTC (including the special rules for veterans) through 2013.  Each new employee hired from a targeted group generally entitles an employer to a credit equal to 40 percent of first-year wages, up to $6,000.

 Research Tax Credit and Other Incentives

 The American Taxpayer Relief Act extends through 2013 the Code Sec. 41 research tax credit. The credit had expired after 2011.  The new law, however, does not make the credit permanent as had been proposed by President Obama and some lawmakers.  

 Along with the research tax credit, the American Taxpayer Relief Act also revives through 2013 many other expired incentives, including: 

1. Employer wage credit for activated military reservists
2. Reduced recognition period for S corporation built-in gains tax
3. Indian employment credit and accelerated depreciation for business property on Indian reservations
4. Code Sec. 45 production tax credit for renewable energy
5. Credits for biodiesel and ethanol
6. Incentives for manufacturers of energy-efficient new homes and appliances
7. Railroad track maintenance credit
8. Mine rescue team training credit

Planning Opportunities

 Unlike many of the individual incentives in the American Taxpayer Relief Act, many of the business tax benefits are not made permanent. As a result, planning to maximize tax savings under these extended incentives takes on a new urgency. Please contact us should you have any questions regarding the 2012 American Taxpayer Relief Act and how it may impact your situation.

Very truly yours,

 Newburg & Company, LLP

The Senate and House of Representatives passed the American Taxpayer Relief Act of 2012 (the “Act”) on January 1, 2013. The bill is heading for the President’s desk today for signature. The Act addresses a partial resolution to the “fiscal cliff” matter primarily covering tax relief and more permanent extension of some of the Bush tax cuts.  We have summarized some of the major provisions included in the Act below. Please note that these are highlights of the Act and are not to be considered a complete analysis of the provisions.

Tax Rates:

Tax rates were scheduled to increase in 2013 for all income brackets. However, with the passing of the Act, the lower income tax brackets remain the same as 2012. The only change involves the highest income bracket. Taxpayers who have taxable income over $400,000 single, $450,000 married filing jointly and $425,000 head of household are taxed at 39.6% on their income above the threshold levels. All other income tax brackets remain the same (10%, 15%, 25%, 28%, 33% and 35%).

Capital Gains and Dividend Rates:

Capital gains and dividend rates will increase for taxpayers exceeding taxable income of $400,000 single and $450,000 married filing joint. The capital gains for these taxpayers will be subject to a tax rate of 20% (up from 15%) and a 3.8% Medicare surtax for a total overall rate of 23.8%.

Under current law, the capital gains and dividend rate for taxpayers below the 25% tax bracket is equal to zero percent.  This provision has been extended. For taxpayers taxed at or above the 25% bracket,  but below the threshold amounts described above, the capital gains rate remains unchanged at 15%. However, these taxpayers may be subject to the 3.8% Medicare surtax on some or all of their investment income.  

Personal Exemption Phase-out:

Personal exemptions will be phased out at the rate of 2% for each $2,500 of Adjusted Gross Income (AGI) over certain threshold amounts. The phase-out will begin if AGI is over $250,000 for a single taxpayer, $300,000 for married taxpayers filing jointly and $275,000 for head of household. 

Itemized Deduction Reduction:

Itemized deductions will be reduced by the lessor of (1) 3% of the excess over the threshold amount (below) or (2) 80% of allowable deductions. The reduction cannot exceed 80% of the otherwise allowable itemized deductions. The reductions will begin if AGI is over $250,000 for a single taxpayer, $300,000 for married taxpayers filing jointly and $275,000 for head of household. 

Alternative Minimum Tax (AMT):

The Act creates increased AMT exemption amounts of $50,600 for single taxpayers and $78,750 for taxpayers filing jointly. These changes would permanently index the AMT exclusion to inflation and avoid the annual “patch” that was required to prevent it from impacting middle-class taxpayers.  In addition, the Act creates an allowance for taxpayers to offset AMT liability with nonrefundable credits (adoption, child, saver’s, residential energy efficient property).  Before the Act, only regular tax liability could be offset by the credits.

Major Items Extended by the Act:

   Individual Provisions:

• American opportunity credit – extended for 5 years
• Deductible educator expenses – extended through 2013
• Discharge of qualified principal residence indebtedness – extended through 2013
• Deductibility of mortgage insurance premiums – extended through 2013
• Deductibility of State and local general sales taxes – extended through 2013
• Tuition and related expense deduction (above –the –line deduction)– extended through 2013
• Special rules for contributors of capital gain real property made for conservation purposes – extended through 2014
• Tax-free distributions from individual retirement plan for charitable purposes – extended through 2014.

   Business Provisions:

• Various depreciation provisions modified and extended;  Section 179, bonus depreciation, 15-year depreciation on leaseholds for qualified restaurants, etc. – extended through 2014
• R&D Credit – extended through 2013 (includes 2012 retroactive as well)
• Exclusion of 100% gain on small business stock under Section 1202 stock acquired before January 1, 2014
• Work Opportunity Tax Credit- extended through 2013 (for new hires of one of eight targeted groups)
• Reduction in S Corporation recognition period for built-in-gains tax under Section 1374(d)7 is extended through 2013 with a ten-year period.
• Various other provisions related to low-income communities, mining, railroad, military personnel, etc.

   Energy Related Provisions:

• Credits for energy-efficient new homes and energy efficient appliances are retroactively extended for two years through 2013.
• Non-business energy property for energy-efficient existing homes is retroactively extended for two years through 2013. Taxpayers can claim a 10% credit on the cost of qualified energy efficient improvements and residential energy property expenditures subject to various lifetime credit limits.
• Various other energy related items (alternative fuel, plug-in electric, biodiesel, etc.)

Estate Tax Considerations:

The Act keeps the lifetime exemption level at $5 million for estate, gift, and generation skipping transfer taxes. The Act makes permanent the unification of estate and gift taxes, creating a single graduated rate for both. In addition, the Act continues the allowance of portability of the lifetime exclusion between spouses. Finally, the Act increases the top estate tax rate from 35% to 40%.

Please note this is not a comprehensive summary. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Form 1099 Reporting Requirements:  

In the course of your trade or business if you paid $600 or more for services to non-incorporated vendors (individuals, partnerships, LLPs and LLCs) for subcontracted or freelance services, professional fees and/or rent, you are required to issue them a Form 1099 by January 31st (February 15th if you are reporting payments in boxes 8 or 14).  These forms need to be filed with the Internal Revenue Service and with state authorities by February 28th.  There are additional filing requirements if you paid dividends, interest and /or retirement benefits. 

Filing Options:

We would like to direct you to an IRS-approved website that can electronically transmit the filings to the appropriate tax reporting agency and mail the recipient copy on your behalf: http://www.efilemyforms.com/.    

Once the data is entered, this service will do the rest. The cost is $3.49 per form and the cost declines if filings are more than 50 forms. This is a very cost effective means to file your 1099s.

As an alternative, you may wish to consider using your payroll service to file these forms and/or to make payments to your service providers that require a 1099 form.  The payroll service can issue these payments via check or direct deposit to the vendor and can accommodate the filing requirements to the respective tax authorities.

Form W-9 is required for vendors to provide tax information to the Company. If you give the Form W-9 to your service providers before you issue them a payment, you will also have the required information for 1099 reporting at year end. Form W-9 can be found at the following link: http://www.irs.gov/pub/irs-pdf/fw9.pdf.

As a reminder, Newburg & Company, LLP is not responsible for filing these forms on your behalf.

New Questions on Business Returns Aimed to Improve Compliance:

Starting in 2011, two questions to confirm compliance were added to all business returns which include sole proprietors (Schedule C), corporations and partnerships (including LLCs and LLPs) For example, the corporate tax return reads:

“Did the corporation make any payments in 2012 that would require it to file Form(s) 1099? Yes or No”

“If Yes, did the corporation file or will it file all required Form(s) 1099? Yes or No”

Owners and officers of their respective businesses are signing the return under penalties of perjury. It is important as the preparer of your tax returns, that we remind you of these questions as they are requisite to the filing of your return.

Increased Penalties:

Failure to issue a 1099 can result in a disallowance of the deduction as well as incurring penalties for each Form 1099 not filed. Please note that penalties have increased significantly from last year.

The following penalties are in effect:

• $30 penalty for filing a 1099 not more than 30 days late with the calendar year maximum increased to $250,000 or $75,000 for small business filers;
• $60 penalty for filing a 1099 more than 30 days late and before August 1st with the calendar year maximum increased to $500,000 or $200,000 for small business filers;
• $100 penalty for filing a 1099 on or after August 1st with the calendar year maximum increased to $1,500,000 or $500,000 for small business filers;
• $250 penalty for intentional failure to file.

Please do not hesitate to contact us should you have any questions regarding your 1099 filing requirements. As an alternative, feel free to email us your questions at info@newburg.com.

The tax is generally imposed on medical devices regulated by the FDA as listed under Section 510(j) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 360). However, if a device is not listed with the FDA and the FDA deems the device should have been listed, then the device is deemed listed as of the date the manufacturer is notified by the FDA in writing. Sales of devices intended for use on animals, eyeglasses, hearing aids and any other medical device determined to be of a type that is generally purchased by the public at retail for individual use, are not subject to the tax.

On December 6, 2012 the IRS issued final regulations to provide guidance on the tax. These final regulations offered further guidance on what is a “taxable medical device” including “dual use” devices, biologic devices, veterinary devices, humanitarian use devices, and software upgrades. The regulations provided a “retail exemption safe harbor,” which includes devices in the FDA’s online in vitro diagnostics Home Use Lab Tests (Over-the-Counter Tests) database, devices the FDA describes as “over the counter” and devices that qualify as durable medical equipment, prosthetics, orthotics or supplies for which payment is available on a purchase basis under the Medicare Part B payment rules. The IRS also provided guidance on transitional relief for installment sales, leases, and long-term contracts and software sold together with services.

The medical devise excise tax is reported on Form 720, Quarterly Federal Excise Tax Return and payment of the tax is due with the return. If the manufacturer’s quarterly net tax liability exceeds $2,500, the manufacturer must submit semimonthly deposits.

In preparation for compliance with the tax, businesses should determine their qualification as a manufacturer and importer for purposes of the tax, whether they sell “taxable medical devices,” if any devices fall under the “retail exemption,” what the taxable sales price is for calculating the tax, and review the applicable form and payment procedures.

Please contact us if you have any questions regarding the medical device excise tax and your business.

Overview

Starting in 2013, if your Adjusted Gross Income (AGI) is over $200,000 as a single taxpayer or $250,000 as a married taxpayer filing jointly, the following new Medicare taxes may impact your 2013 tax liability:

1. 0.9% on wages and self-employment income
2. 3.8% on the lesser of your “net investment income” or your AGI over the threshold amounts listed above ($200K or $250K)

Note: you could be subject to both taxes, however, the increases do not apply to the same category of income. You will never pay the additional 0.9% and the 3.8% on the same income.

Further Information on 3.8% tax on Net Investment Income

Net Investment Income for the purposes of the 3.8% tax includes taxable interest and dividends, long and short term capital gains, annuity income, royalties, passive rental income and income from a passive trade or business. Items excluded from net investment income include wages, self-employment income, distributions from retirement plans/IRAs, S Corps/LLC profits (assuming active participation) and tax exempt interest/dividends.

Note: distributions from retirement accounts are not considered investment income; however, they are included in the calculation of your AGI to determine if you are above the AGI threshold.

Application to Trusts

The 3.8% tax also applies to estates and trusts. The tax is computed on the lesser of undistributed net investment income or the excess amount of AGI over the threshold amount ($11,650 for 2012).

Individual Taxpayer Examples

Example 1 – Jay, a single taxpayer, has $125,000 of salary and $50,000 of net investment income. The new Medicare tax will not apply to him because his AGI is under the $200,000 threshold.

Example 2 – Maria, a single taxpayer, has $250,000 of net investment income and no other income. She would have to pay an additional $1,900 (($250,000 – $200,000) X 3.8%).

Example 3 – Fred and Sue have $195,000 of capital gain and dividend income. Their AGI for 2013 totals $262,500 and they file a joint return. Their AGI is $12,500 over the threshold for married taxpayers ($262,500 – $250,000). They will pay the 3.8% tax on the $12,500 excess AGI because it is less than their $195,000 of net investment income. Their additional tax for 2013 is $475 (($262,500 – $250,000) X 3.8%).

Example 4 – Mike and Denise, married filing jointly, also have net investment income of $195,000, but their 2013 AGI totals $526,000. Their additional tax is calculated on the lesser of net investment income, $195,000, or their excess AGI over the threshold, $276,000 ($526,000-$250,000). Thus, their tax base is $195,000 and their liability for the tax is $7,410 ($195,000 X 3.8%).

Example 5 – Karen and Howard, married taxpayers, have wages of $225,000 and net investment income of $90,000 making up their 2013 AGI of $315,000. The couple will incur the additional 3.8% tax on the lesser of their $90,000 of net investment income, or $65,000 of AGI in excess of the $250,000 threshold. Thus, Karen and Howard will incur a $2,470 (3.8% x $65,000) unearned income Medicare contribution tax in 2013.

Example 6 – Diana and Mark, married taxpayers, have wages totaling $275,000 and net investment income of $0 in 2013. For 2013, the couple will incur an additional 3.8% tax on the lesser of their $0 of net investment income or $25,000 of AGI in excess of the $250,000 threshold. Because Diana and Mark have no unearned income they would not have an unearned income Medicare contribution tax in 2013. However, their excess wages would be subject to the additional 0.9% tax on wages and earned income.

Example 7 – A married couple, filing jointly, have $130,000 of 401(k) income and $110,000 of net investment income. One spouse took a $50,000 distribution from a Roth IRA. The couple has AGI of $240,000. The 3.8 percent surtax does not apply because the couple’s MAGI is below the $250,000 threshold. Note: qualifying Roth IRA distributions are not taken into account for income purposes, nor is the distribution deemed net investment income.

Example 8 – A married couple, filing jointly, have $130,000 of 401(k) income and $110,000 of net investment income. One spouse took a $50,000 distribution from a Traditional IRA. The couple has AGI of $290,000. The 3.8 percent surtax applies to $40,000 of net investment income, the lesser of the net investment income of $110,000 or the amount over the $250,000 threshold. Note: Traditional IRA distributions are not classified as net investment income; however, they are considered for AGI purposes.

Example 9 – In 2013, a married couple sells their principal residence. The sale qualifies for up to $500,000 of the gain to be excluded from their income under Code Sec 121. The total gain on the sale of the residence is $700,000. The taxpayers’ net investment income is $200,000 ($700,000 gain − $500,000 exclusion on sale of primary residence). They have no other net investment income in 2013. Their AGI is computed by adding the $200,000 of gain not excluded from the sale of their residence to their salary of $310,000; thus, their 2013 AGI is $510,000. Their AGI is $260,000 above the threshold for married filing joint taxpayers ($510,000 − $250,000). The tax applies to the lesser of their $200,000 net investment income or the excess of their AGI over the threshold, $260,000. Therefore, they will pay a 3.8% unearned income Medicare tax of $7,600 (.038 x $200,000) as a result of selling their residence at a $700,000 gain.

Trust Examples

Example 1 – A trust has investment income of $60,000 and has not made any distributions during the tax year. The 3.8 percent surtax applies to $48,350 of income, the lesser of the net investment income of $60,000 or the amount over the $11,650 threshold.

Example 2 – A trust has investment income of $60,000 and during the tax year has distributed 100 percent of the income. The 3.8 percent surtax will not apply to the trust since it did not retain any investment income. However, depending upon the beneficiary’s situation the surtax may apply at the individual level.

Planning Opportunities

For 2012, your situation may benefit from taking advantage of the current year’s lower rates. Below, please find some areas that can be considered for year-end as we plan for these tax increases:

1. Assess your current realized and unrealized gains and losses to avoid additional tax and potentially harbor losses for 2013;
2. Consider tax exempt bonds which are excluded from AGI calculations;
3. Convert to a Roth IRA in 2012 to avoid future inclusion of taxable distributions included in AGI;
4. Review trust provisions and planning considerations (for example, distributing to beneficiaries instead of keeping investment income in trust).

 Please contact us if you have any questions.

We appreciate your support!

About Autism Speaks

Autism Speaks is dedicated to increasing awareness of autism spectrum disorders, to funding research into the causes, prevention and treatments for autism, and to advocating for the needs of individuals with autism and their families. It was founded in February 2005 by Suzanne and Bob Wright, the grandparents of a child with autism. Bob Wright is Senior Advisor at Lee Equity Partners and served as vice chairman, General Electric, and chief executive officer of NBC for more than twenty years. To learn more about Autism Speaks, please visit www.autismspeaks.org.

About Walk Now for Autism Speaks

Autism Speaks is proud of our signature fundraising event which brings together hundreds of thousands of participants annually across the United States and Canada with a common goal of supporting Autism Speaks. This change strengthens the marketing efforts around the Walk program by more directly branding the walks with our name, effectively eliminating any confusion with other autism walks around the world.

Powered by volunteers and families with loved ones on the autism spectrum, this successful grassroots fundraising effort not only generates vital funds for autism research but also raises awareness about the increasing prevalence of autism and the need for increased research funding to combat this complex disorder. To see a current list of walk sites please visit www.walknowforautismspeaks.org.