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Summary of The House-Senate Compromise on Tax and Spending Bills

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The Senate by a 65-33 vote gave final approval on December 18 to tax and spending compromise legislation that included a $622 billion package of tax extenders. The House approved the extenders legislation by a 318-109 vote on December 17. President Obama has said that he would sign the legislation. Below is an overview of important tax provisions from the package, which was negotiated by Congressional leaders and released on December 15.

Individual and Family Provisions

 The Bill contains numerous provisions that would benefit individuals and families. Some key tax provisions that have long been temporary would become permanent, while others would only get another temporary extension. Some of the key provisions that are being made permanent are:

  • the enhanced child tax credit,
  • the enhanced American opportunity tax credit,
  • the enhanced earned income tax credit,
  • the deduction of certain expenses for elementary and secondary school teachers, and
  • the deduction for State and local general sales taxes in lieu of State and local income taxes (Division Q, 101-§105).

The permanency of these provisions should provide more certainty for individuals and families, who will no longer have to wonder whether they will still be around from year to year.

There are also several temporary extenders that would benefit individuals and families. Three provisions that are particularly important to homeowners are being extended through 2016:

  • the exclusion from gross income of discharge of qualified principal residence indebtedness,
  • the provision allowing mortgage insurance premiums to be treated as qualified residence interest, and
  • the credit for nonbusiness energy property (Division Q, 151, §152, §181).

Health & Compensation Planning

 The congressional budget deal would provide relief from certain excise taxes under the Affordable Care Act. The Bill would:

  • Provide for a two-year delay on the excise tax on high-cost employer-sponsored health coverage (the “Cadillac” tax), meaning that the tax would first be effective in 2020 rather than 2018 as The Bill would also permit the tax to be deductible as a business expense and require a study on the benchmark for the threshold measurement of the Cadillac tax. (Division P, §101-103)
  • Provide for a one-year moratorium on the annual excise tax imposed on health insurance providers for calendar year (Division P, §201)
  • Prohibit the IRS and HHS from using the funds provided under the deal to support the Affordable Care Act (Division E, 113, Division H, §225, Division H, §226)

The tax extenders deal would provide additional tax relief and clarifications. The Bill would:

  • Permanently extend the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. (Division Q, 105)
  • Modify the filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve (Division Q, §201)
  • Permanently extend the ability of individuals at least 70 ½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts. (Division Q, 112)
  • Extend the special rule under current law for current benefits paid by accident or health plans of a public retirement system to such benefits paid by plans established by or on behalf of a state or political (Division Q, §305)
  • Allow a taxpayer to roll over amounts from an employer-sponsored retirement plan to a SIMPLE (Division Q, §306)
  • Clarifies the effective dates of Public Law 113-243 to allow certain airline employees to contribute amounts received in certain bankruptcies to an IRA without being subject to the annual contribution limit. (Division Q, 307)
  • Extends the relief providing an exception to the 10-percent penalty on withdraws from retirement accounts before age 50 to include nuclear materials couriers, S. Capitol Police, Supreme Court Police and diplomatic security special agents. (Division Q, §308)
  • Clarify certain rules governing church plans, including preventing the IRS from aggregating certain church plans together for purposes of the non-discrimination rules, and providing flexibility for church plans to decide which other church plans with which they (Division Q, §336)

General Business Provisions

The proposed Bill includes many business-friendly provisions. Most notably, the research and development credit would be made permanent (Division Q, §121), along with the enhanced limitations asset expensing under §179 (Division Q, §124). Numerous other provisions would get temporary extensions, some through 2016, and some through 2019.

Some of the noteworthy provisions that would be extended through 2019 are:

  • the new markets tax credit,
  • the work opportunity tax credit, and
  • “bonus” depreciation for qualified property. (Division Q, 141-§143)

Some of the noteworthy provisions that would be extended through 2016 are:

  • the Indian employment tax credit,
  • the special expensing rules for certain film and television productions, and
  • the energy efficient commercial buildings (Division Q, §161, §169, §190)

S Corporations

  • The S corporation holding period under 1374(d)(7) for recognition of built-in gains after conversion from a C corporation would be permanently extended to 5 years. Pre-existing installment sales would continue to be governed by the holding periods for the years of sale. (Division Q, §127)
  • The provision under 1367(a)(2) that upon an S corporation’s charitable contribution of property, the shareholder’s basis in the S corporation stock would be reduced by the shareholder’s pro rata basis in the donated property (rather than the pro rata fair market value of the donated property had the provision expired) would be permanently extended. (Division Q, §115)

Regulated Investment Companies

  • The provisions under 871(k) allowing a RIC to flow-through the character of qualified net interest income and qualified short-term gains to foreign shareholders by reporting such amount would be permanently extended. (Division Q, §125)
  • The treatment of RICs as qualified investment entities under FIRPTA would be permanently (Division Q, §133)
  • Interests in RICs would not be excluded from the definition of United States real property Interests in RICs would be excluded from the interests in domestic corporations, which are eligible to be excluded from the definition of United States real property interest. (Division Q, §325) (see also International, below)
  • Dividends derived from RICs would be ineligible for a deduction for the United States source portion of dividends from certain foreign corporations. Dividends from RICs would be excluded from the definition of post-1986 undistributed United States earnings for purposes of determining the amount of a dividend paid by a qualified 10-percent owned foreign corporation for which a deduction is (Division Q, §326) (see also International, below)

Qualified Small Business Stock

  • For taxpayers other than corporations, the exclusion from gross income under 1202 of 100% of the gain recognized on the sale or exchange of Qualified Small Business (QSB) stock held for more than five years would be permanently extended. (Division Q, §126)

Estates, Gifts, and Trusts

In the area of Estates, Gifts, and Trusts, the Bill would make permanent certain charitable deduction provisions which have been subject to one-year extensions in the past. The Bill would add some additional provisions which would either add, clarify, or enhance certain charitable contributions. The Bill would also make certain changes to the valuation of certain trusts. Finally, the Bill would make certain changes and additions with respect to the recognition, termination, and appeal rights of certain tax-exempt organizations. The following is a summary of those provisions.

  • The enhanced income tax charitable deduction for certain conservation easement donations under 170(b)(1)(E) would be made permanent. (Division Q, §111(a)(1))
  • The enhanced qualified conservation contribution for certain corporate farmers and ranchers under 170(b)(2)(B) would be made permanent. (Division Q, §111(a)(2))
  • Add new 170(b)(2)(C) which would permit Alaska Native Corporations to deduct donations of conservation easements up to 100% of taxable income beginning in 2016. (Division Q, §111(b))
  • The enhanced income tax charitable deduction for certain contributions of inventory of apparently wholesome food under §170(e)(3)(C) would be made permanent. (Division Q,113). The Bill would also increase the limitation on deductible contributions of food inventory and provide special rules for valuing food inventory.
  • Provide that charitable contributions made after the date of enactment to an agricultural research organization would be subject to the higher individual limits if the organization commits to use the contribution for agricultural research before January 1 of the fifth calendar year that begins after the date of the contribution. In addition, agricultural research organizations are treated as public charities per se, without regard to their sources of financial (Division Q, §331)
  • Clarify the valuation method for the early termination of certain charitable remainder unitrusts for the termination of trusts made after the date of (Division Q, §344).
  • Require the IRS to create procedures under which a 501(c) organization facing an adverse determination may request administrative appeal to the IRS Office of Appeals. The provision would apply to determinations made after May 19, 2014. (Division Q, §404)
  • Provide a streamlined recognition process for organizations seeking tax exemption under 501(c)(4). The IRS would be required to provide a letter of acknowledgement of the registration within 60 days after an application is submitted. (Division Q, §405)
  • Permit 501(c)(4) organizations and other exempt organizations to seek review in Federal court of any revocation of exempt status by the IRS. The provision applies to pleadings filed after the date of enactment. (Division Q, §405)
  • Treat transfers to organizations exempt from tax under §501(c)(4), 501 (c)(5), and §501 (c)(6) as exempt from the gift tax for transfers made after the date of enactment. (Division Q, §408)

Reforms to Real Estate Investment Trusts

The proposed Bill would curb real estate investment trust (REIT) spinoffs, beginning December 7, 2015. In a REIT spinoff, a corporation separates its business into a taxable operating company and a real property company whose income generally is not taxable at the corporate level. The spinoff itself also is tax-free. The IRS recently has drawn attention to what it perceives to be abuses of this practice, and proposed legislation would address those concerns. With two major exceptions, spinoffs where either the distributing corporation or the controlled corporation is a REIT would no longer be eligible for tax free treatment. The first exception would be for spinoffs of a REIT by another REIT. This exception would apply where both the distributing corporation and the controlled corporation are REITs immediately

after the spinoff. The second exception would apply to spinoffs of taxable REIT subsidiaries. In this case, the distributing corporation must have been a REIT for the prior three years and the controlled corporation must have been a taxable REIT subsidiary during the same time. Neither a distributing nor a controlled corporation can elect to be treated as a REIT for ten years after a tax-free spinoff.

While tightening the rules pertaining to tax-free spinoffs, the proposed Bill would relax the Foreign Investment in Real Property Tax Act (FIRPTA) rules, which are viewed as imposing a barrier to foreign investment in U.S. real property. FIRPTA imposes income tax on foreign persons disposing of a U.S. real property interest (USRPI) and requires purchasers of those interests to withhold 10% of the sales price. The proposed Bill would raise from 5% to 10% the stake a stockholder can own in publicly traded stock of a REIT without triggering the FIRPTA withholding taxes. The Bill would also allow certain publicly traded entities to receive distributions from a REIT without the distribution being treated as gain from the sale of a USRPI.

The proposed legislation would also make numerous other changes to the REIT provisions, including modifications of the calculation of REIT earnings and profits, the rules pertaining to the types of assets a REIT may own and permissible sources of income, and the rules governing services provided by taxable REIT subsidiaries. (Division Q, §311-§326)

Reforms to the IRS and the Tax Court

The proposed Bill also includes IRS reforms to protect taxpayer rights. Beginning on the date of enactment, the IRS Commissioner would be responsible for ensuring that all IRS employees are familiar with and act in accord with taxpayer rights. Additionally, the Taxpayer Bill of Rights, as proposed by the National Taxpayer Advocate and subsequently adopted by the IRS, would be codified in the Bill. Further, the legislation would create the ability for a taxpayer who suffered an unauthorized disclosure, unauthorized inspection of returns or return information, or other offense by an officer or employee of the United States, to ascertain whether an investigation occurred, the status of an investigation, its outcome, and whether action was taken against the offending individual.

The Bill would also change several items relating to the Tax Court. One of the most significant changes would permit a taxpayer to file a Tax Court case in interest abatement matters where the IRS has failed to issue a final determination within six months. Further, the Bill would permit a taxpayer to elect small case status for interest abatement cases where the abatement does not exceed $50,000. The legislation would also clarify provisions relating to the appeal of innocent spouse relief and collections cases. For petitions filed after the date of enactment, a Tax Court decision in these cases would be appealed to the

U.S. Court of Appeals for the circuit in which an individual’s legal residence is located or in which a business’ principal place of business or principal office of agency is located. Additionally, when a taxpayer has filed a bankruptcy case and is prohibited from filing a Tax Court petition in innocent spouse relief and collection cases, the period for filing a petition would be suspended during the prohibition period and for an additional amount of time. (Division Q, §421-§441)

International

The Bill would change some of the rules under the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980, §897 and §1445. The rate of withholding from dispositions of U.S. real property interests under 1445 would be increased from 10% to 15%, but would remain at 10% for residences sold for less than $1 million (Division Q, §324). The Bill also would add two new relaxations of FIRPTA. First, §897 would not apply to real property interests that otherwise would be U.S. real property interests (USRPIs) if they are held directly by qualified foreign retirement or pension funds, or if held indirectly by them through one or more partnership (Division Q, §323). Second, the Bill would increase from 5% to 10% the ownership percentage that under §897(c)(3) allows small interests in publicly traded corporations not to be considered to be U.S. real property interests (Division Q, §322). Collaterally, constructive ownership rules under §897(c)(6)(C) would not be applied to attribute ownership of public companies to or from associated persons in making this test unless shares owned by the associated person amounted to “more than 10 percent” (an increase from “more than 5 percent”) (Division Q, §322). A slight tightening of the rule treating companies that had disposed of all USRPIs as having “purged” their own shares of status as USRPIs would be implemented by requiring the company trying to purge itself of that status not to have been regulated investment companies (RICs) or real estate investment trusts (REITs) during the relevant measurement period. (Division Q, §325)

The Bill would deny a deduction for the U.S. source portion of dividends derived from RICs and REITs by adding a new paragraph (12) to §245(a). (Division Q, §326)

The Bill also includes several international-related extenders:

  • Permanent extension of subpart F exception for active financing income. (Division Q, §128)
  • Extension of RIC qualified investment entity treatment under FIRPTA. (Division Q, §133)
  • Extension through 2019 of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules. (Division Q, §144)

Payroll

Payroll provisions contained in the Bill include:

  • Permanent extension of qualified transportation fringe transit parity becoming permanent (and retroactive—which is not payroll-friendly). (Division Q, §105)
  • Permanent extension of the military active duty wage credit. (Division, Q, §122)
  • Extension and modification through 2019 of the work opportunity tax credit for first year wages paid. (Division Q, §142)
  • Modification of filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve compliance. (Division Q, 201)
  • “Safe harbor” for incorrect information on Forms W-2 and 1099s. (Division Q, §202)

This information is derived from a summary provided by The Bureau of National Affairs, Inc.

Medicare Taxes on High-Income Earners and Investors Continue

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In 2015, high-income taxpayers continue to be subject to Medicare surtaxes—a 3.8% Medicare contribution tax on net investment income and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the two taxes and what they will mean to you.

3.8% Medicare Contribution Tax on Net Investment Income

This tax will only affect taxpayers whose adjusted gross income (AGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for a married individuals filing separately. These threshold amounts aren’t indexed for inflation. Thus, as time goes by, inflation will cause more taxpayers to become subject to the 3.8% tax.

Your AGI is the bottom line on Page 1 of your Form 1040. It consists of your gross income minus your adjustments to income, such as the IRA deduction. If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.

If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply to the lesser of (1) your net investment income for the tax year or (2) the excess of your AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.

Take, for example, a married couple that has AGI of $270,000 for 2015, of which $100,000 is net investment income. They would pay a Medicare contribution tax on only the $20,000 amount by which their AGI exceeds their threshold amount of $250,000. That is because the $20,000 excess is less than their net investment income of $100,000. Thus, the couple’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Now assume that the couple’s AGI was $350,000. Because their AGI exceeds their threshold amount by $100,000, they would pay a Medicare contribution tax on their full $100,000 of net investment income. Their Medicare contribution tax would then be $3,800 ($100,000 × 3.8%).

Net investment income: The “net investment income” that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn’t included in net investment income, nor is wage income.

However, passive business income is subject to the Medicare contribution tax. Thus, rents from an active trade or business aren’t subject to the tax, but rents from a passive activity are subject to it. Income from a business of trading financial instruments or commodities is also included in net investment income.

Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8% tax. Of course, this should be done with due regard to your income needs and investment considerations.

Home sales: Many people have asked how the 3.8% tax applies to home sales. If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won’t be subject to the 3.8% Medicare contribution tax.

However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the income tax exclusion, will also be subject to the Medicare contribution tax.

For example, say that a married couple has AGI of $200,000 for 2015 and in addition sold their main home for a $540,000 gain. The couple qualified for the full $500,000 exclusion of gain on the sale, leaving only $40,000 of taxable gain. As a result, the couple won’t be subject to the 3.8% tax, because their total AGI ($200,000 + $40,000) will fall below the $250,000 threshold.

But if the gain on the home sale was $680,000, of which $180,000 was taxable, the couple would be subject to the 3.8% tax on $130,000 of the gain. That is the amount by which their total AGI of $380,000 ($200,000 + $180,000) exceeds their $250,000 threshold.

Retirement plan distributions: Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the Medicare contribution tax. However, those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.

This makes Roth IRAs more attractive for higher-income individuals, because qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI. Distributions from traditional IRAs will be included in AGI, except to the extent of after-tax contributions, although they won’t be subject to the Medicare contribution tax.

Estimated tax: The Medicare contribution tax must be included in the calculation of estimated tax that you owe. Thus, if you will be subject to the tax, you may have to make or increase your estimated tax payments to avoid a penalty. We can assist you in making this calculation.

0.9% Additional Medicare Tax on Wage and Self-Employment Income

In 2015, some high wage earners will continue to pay an extra 0.9% Medicare tax on a portion of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for a married individuals filing separately, and $200,000 for all others. The 0.9% tax applies only to employees, not to employers.

For joint filers, the additional tax applies to the spouses’ combined wages. For example, suppose that a married couple earns combined wages of $300,000 in 2015. On a joint return, they will pay Medicare tax of $3,625 ($250,000 × 1.45%) on their first $250,000 of wages and $1,175 on their combined wages the excess of $250,000 ($50,000 × 2.35%), for a total Medicare tax of $4,800.

Once an employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax from the wages. However, this withholding may prove insufficient if the employee has additional wage income from another job or if the employee’s spouse also has wage income. To avoid that result, an employee may request extra income tax withholding by filing a new Form W-4 with the employer. The extra withholding can then be applied to the liability for the additional 0.9% tax.

Self-employment tax: An extra 0.9% Medicare tax also applies to self-employment income for the tax year in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. This 0.9% tax is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds will be reduced by the taxpayer’s wage income.

For example, if a married couple has combined self-employment income of $300,000 for 2015 (and no wages), they will pay Medicare tax of $7,250 ($250,000 × 2.9%) on the first $250,000 of that income and $1,900 on the excess of their combined self-employment income over $250,000 ($50,000 × 3.8%), for a total Medicare tax of $9,150.

While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the additional 0.9% tax won’t generate any income tax deduction.

As you can see, these two taxes will have a significant effect on your tax picture going forward. We would be happy to meet with you to discuss these taxes and how their impact can be reduced.

GREENBERG, ROSENBLATT, KULL & BITSOLI, P.C. IS PLEASED TO ANNOUNCE DAVID J. MAYOTTE AS DIRECTOR

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David J. Mayotte, CPA/ABV, CVA, CFE, CFF, of Woodstock, CT, has been named a Director of the firm.  Mr. Mayotte, who joined the firm in 1994, specializes in providing accounting and tax services to individuals and privately-held businesses, including performing business valuations and consulting on valuation matters, and litigation support/forensic accounting.  Mr. Mayotte is a member of the American Institute of Certified Public Accountants, the National Association of Certified Valuators and Analysts, the Association of Certified Fraud Examiners, the Massachusetts Society of Certified Public Accountants, and the Worcester Economics Club.  He also serves as Treasurer of Music Worcester.  He received his BS from Nichols College.

*****

GRKB (www.GRKB.com) of Worcester, Massachusetts is one of the region’s largest independent accounting firms and a member of JHI, an association of worldwide independent CPA firms. GRKB provides comprehensive accounting, tax, valuation and consulting services for business entities, non-profit organizations, individuals, trusts and estates.

Medicare Taxes on High-Income Earners and Investors

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In 2014, high-income taxpayers continue to be subject to Medicare surtaxes—a 3.8% Medicare contribution tax on net investment income and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the two taxes and what they will mean to you.

3.8% Medicare Contribution Tax on Net Investment Income

This tax will only affect taxpayers whose adjusted gross income (AGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for a married individuals filing separately. These threshold amounts aren’t indexed for inflation. Thus, as time goes by, inflation will cause more taxpayers to become subject to the 3.8% tax.

Your AGI is the bottom line on Page 1 of your Form 1040. It consists of your gross income minus your adjustments to income, such as the IRA deduction. If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.

If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply to the lesser of (1) your net investment income for the tax year or (2) the excess of your AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.

Take, for example, a married couple that has AGI of $270,000 for 2014, of which $100,000 is net investment income. They would pay a Medicare contribution tax on only the $20,000 amount by which their AGI exceeds their threshold amount of $250,000. That is because the $20,000 excess is less than their net investment income of $100,000. Thus, the couple’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Now assume that the couple’s AGI was $350,000. Because their AGI exceeds their threshold amount by $100,000, they would pay a Medicare contribution tax on their full $100,000 of net investment income. Their Medicare contribution tax would then be $3,800 ($100,000 × 3.8%).

Net investment income: The “net investment income” that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn’t included in net investment income, nor is wage income.

However, passive business income is subject to the Medicare contribution tax. Thus, rents from an active trade or business aren’t subject to the tax, but rents from a passive activity are subject to it. Income from a business of trading financial instruments or commodities is also included in net investment income.

Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8% tax. Of course, this should be done with due regard to your income needs and investment considerations.

Home sales: Many people have asked how the 3.8% tax applies to home sales. If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won’t be subject to the 3.8% Medicare contribution tax.

However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the income tax exclusion, will also be subject to the Medicare contribution tax.

For example, say that a married couple has AGI of $200,000 for 2014 and in addition sold their main home for a $540,000 gain. The couple qualified for the full $500,000 exclusion of gain on the sale, leaving only $40,000 of taxable gain. As a result, the couple won’t be subject to the 3.8% tax, because their total AGI ($200,000 + $40,000) will fall below the $250,000 threshold.

But if the gain on the home sale was $680,000, of which $180,000 was taxable, the couple would be subject to the 3.8% tax on $130,000 of the gain. That is the amount by which their total AGI of $380,000 ($200,000 + $180,000) exceeds their $250,000 threshold.

Retirement plan distributions: Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the Medicare contribution tax. However, those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.

This makes Roth IRAs more attractive for higher-income individuals, because qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI. Distributions from traditional IRAs will be included in AGI, except to the extent of after-tax contributions, although they won’t be subject to the Medicare contribution tax.

Estimated tax: The Medicare contribution tax must be included in the calculation of estimated tax that you owe. Thus, if you will be subject to the tax, you may have to make or increase your estimated tax payments to avoid a penalty. We can assist you in making this calculation.

0.9% Additional Medicare Tax on Wage and Self-Employment Income

In 2014, some high wage earners will pay an extra 0.9% Medicare tax on a portion of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for a married individuals filing separately, and $200,000 for all others. The 0.9% tax applies only to employees, not to employers.

For joint filers, the additional tax applies to the spouses’ combined wages. For example, suppose that a married couple earns combined wages of $300,000 in 2014. On a joint return, they will pay Medicare tax of $3,625 ($250,000 × 1.45%) on their first $250,000 of wages and $1,175 on their combined wages the excess of $250,000 ($50,000 × 2.35%), for a total Medicare tax of $4,800.

Once an employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax from the wages. However, this withholding may prove insufficient if the employee has additional wage income from another job or if the employee’s spouse also has wage income. To avoid that result, an employee may request extra income tax withholding by filing a new Form W-4 with the employer. The extra withholding can then be applied to the liability for the additional 0.9% tax.

Self-employment tax: An extra 0.9% Medicare tax also applies to self-employment income for the tax year in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. This 0.9% tax is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds will be reduced by the taxpayer’s wage income.

For example, if a married couple has combined self-employment income of $300,000 for 2014 (and no wages), they will pay Medicare tax of $7,250 ($250,000 × 2.9%) on the first $250,000 of that income and $1,900 on the excess of their combined self-employment income over $250,000 ($50,000 × 3.8%), for a total Medicare tax of $9,150.

While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the additional 0.9% tax won’t generate any income tax deduction.

As you can see, these two taxes will have a significant effect on your tax picture going forward. We would be happy to meet with you to discuss these taxes and how their impact can be reduced.

Rick Powell, CPA, serves as expert panelist at the Venture Forum program featuring former chief evangelist of Apple, Guy Kawasaki

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June 2014 – Worcester, MA — Rick Powell, CPA, a Senior Vice President at Greenberg, Rosenblatt, Kull & Bitsoli, P.C., served on a Panel of Experts at The Venture Forum June program featuring Guy Kawasaki.  Serving on the panel with Rick were leading Intellectual Property Attorneys and Venture Capitalists.  The panel focused on matters relative to entrepreneurs getting their first investment and how to organize the venture and team for long-term growth and success. Guy Kawasaki spoke of his time as chief evangelist at Apple, as well as his experiences in a multitude of his other ventures including author, consultant and VC.  The Venture Forum is a not-for-profit organization providing education, advice and inspiration for entrepreneurs.

IRS Adds Tax Refund Status Tracker to Smartphone App

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Updated IRS Smartphone App IRS2Go Version 4.0 Now Available

IR-2014-11, Feb. 4, 2014

WASHINGTON — The Internal Revenue Service today announced the release of IRS2Go 4.0, an update to its smartphone application featuring new added features available in both English and Spanish.

The redesigned IRS2Go provides new features for taxpayers to access the latest information to help them in the preparation of their tax returns. In this version, IRS2Go highlights the addition of an innovative new refund status tracker, providing taxpayers an easy-to-use feature to follow their tax return throughout the process.

“The new version of IRS2Go provides taxpayers another way to quickly get information and help around the clock,” said IRS Commissioner John Koskinen. “The IRS is focused on providing taxpayers with convenient self-service tools like IRS2Go, which provides details on everything from tax refunds to free tax assistance.”

There have been about 3.5 million downloads of IRS2Go since its inception in 2011. iPhone and iPod Touch users can update or download the free IRS2Go application by visiting the iTunes App Store. Android users can visit Google Play to download the free IRS2Go app.

The newest version of the free mobile app offers a number of safe and secure ways for taxpayers to access other popular tools and the most up-to-date tax information, including:
•Refund Status. Taxpayers can check the status of their federal tax refund through IRS2Go. People simply enter their Social Security number, which will be masked and encrypted for security purposes, then select their filing status and enter the amount of their anticipated refund for their 2013 tax return. A new refund status tracker has been added so that taxpayers can follow their tax return throughout the process. Users can check their refund status 24 hours after the IRS acknowledges receipt of an e-filed return, or four weeks after mailing a paper return. The IRS reminds taxpayers the tool is updated just once a day, usually overnight, so there is no reason to check more than once a day.

•Free Tax Prep Providers. The IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) Programs offer free tax help for taxpayers who qualify. This brand new tool on IRS2Go will help taxpayers find the nearest VITA site to their home by simply entering their zip code and selecting a mileage range. By clicking on the directions button within the results, the maps application on the device will load with the address, making it easy to navigate to your desired location.

•Tax Records. Taxpayers can request their tax account or tax return transcript from IRS2Go. The transcript will be delivered via the U.S. Postal Service to their address of record.

•Stay Connected. Taxpayers can interact with the IRS by following the IRS on Twitter, @IRSnews or @IRSenEspanol, watching helpful videos on YouTube, signing up for email updates or by using the Contact Us feature.

For more information on IRS2Go, products and services through social media channels and other media products, visit www.IRS.gov.

For this IRS announcement, visit http://www.irs.gov/uac/Newsroom/Updated-IRS-Smartphone-App-IRS2Go-Version-4.0-Now-Available

IRS – 2014 Tax Season to Open Jan. 31

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WASHINGTON — The Internal Revenue Service today announced plans to open the 2014 filing season on Jan. 31 and encouraged taxpayers to use e-file or Free File as the fastest way to receive refunds.
To read the full IRS announcement, visit the following link.
http://www.irs.gov/uac/Newsroom/2014-Tax-Season-to-Open-Jan.-31;-efile-and-Free-File-Can-Speed-Refunds