The 3.8% Tax on Net Investment Income Demystified!

Many watching the fiscal cliff debacle with trepidation, heaved a sigh of relief when the number "$450,000" seemed to have been decided upon as the sign of those that are going to get hit by all the big taxes. However what many missed is the sneaky 3.8% "Obamacare Tax" that went into effect on Jan. 1st, 2013. 

The Net Investment Income Tax (NIIT) is imposed by Sec 1411 of the Internal Revenue Code (IRC). This tax applies at a rate of 3.8% on certain investment income of individuals, estates and trusts that have income over the statutory thresholds. 

The 3.8% surtax applies to the lessor of: 

• Net Investment Income (defined later) OR
• The excess of modified adjusted gross income (MAGI) over the thresholds,

                     Married Filing Jointly or Surviving Spouse: $250,000

                     Single or Married Filing Separately: $125,000

                     All Others: $200,000

Note that if you are an individual exempt from Medicare Taxes, you may still be subject to the NIIT if you have Net Investment Income and MAGI over the above thresholds.

What is Net Investment Income?   In general, investment income includes, but is not limited to: 

• interest, dividends, 
• rental and royalty income, 
• non-qualified annuities, 
• income from businesses involved in trading of financial instruments or commodities, 
• businesses that are passive activities to the taxpayer (within the meaning of IRC section 469),
• capital gains from sale of stocks; bonds; mutual funds; distributions from mutual funds; sale of investment real estate (including sale of second home not primary residence); sale of interests on partnerships and S corporations (to the extent you were a passive owner). 

To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income.

What is NOT Net Investment Income:  

Wages, unemployment compensation; operating income from a non-passive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends and distributions from certain Qualified Plans.

How Do You Report & Pay the NIIT?: 

For individuals, the tax is reported and paid on Form 1040 and for estates & trusts, the tax will be reported and paid on Form 1041. The NIIT is also subject to the Estimated Tax Provisions. (See post: Do I have to pay estimated taxes?) You can also request that your withholding from wages be increased if you are expecting to be hit with the NIIT. 

Update Posted on 08/07/2013 on the Buzz About Taxes Here.

Bibliography: 

1. Proposed Regulations Department of Treasury. 
2. Internal Revenue Service-FAQ's
3. AICPA January 2013 Update Seminar Materials

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Please read my disclaimer here. For more questions regarding this and other matters, I can be contacted at manasa@mntaxsolutionsllc.com. 

Foreign Bank Accounts Regulations Part III

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In my earlier posts, Part I- here and Part II-here, we explored staying in compliance for FBAR regulations and the Foreign Account Tax Compliance Act (FATCA). We saw that all US Taxpayers who had foreign bank accounts more than $10,000 at any time during the year had to file Form TD F 90-22.1. 

In this post let's look at the new Form 8938, Statement of Specified Foreign Financial Assets. This form was introduced by the IRS after passing the FATCA in 2010. For those to whom the rules would be applicable, would have filed this form for the first time with their 2011 tax return. In IRS-speak, "Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return.  Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad." Remember this Form has to be filed along with your tax return. 

I. Who Must File?:  You are a "specified" individual if you are:

• A US Citizen
• A resident alien for any part of the Tax Year.
• A non-resident alien who makes an election to be treated as a resident alien for purposes of filing a joint return OR who is a bonafide resident of American Samoa or Puerto Rico. 

II. When Must You File?: If you are a specified individual AND a you have an interest in a specified foreign financial asset, which is:

• Any financial account maintained by a foreign financial institution
• Other foreign financial assets held for investment that are NOT in an account maintained by a US or Foreign Financial Institution, namely: 

1. Stock or Securities issued by someone who is not a US person
2. ANY interest in a foreign entity, AND
3. Any financial instrument or contract that has an issuer who is not a US person. 

To interpret the legalese, the IRS now considers not only your foreign bank accounts as reportable but also any investments in entities that are foreign. There are reporting thresholds that apply to these financial assets, which depend on your filing status and where you live during the year. 

III. In addition to I and II above:  You are required to file Form 8938 if your specified foreign financial assets (SFFA) is MORE than the reporting threshold that applies to you: 

• Unmarried Taxpayer Living in the US: Total Value of SFFA >$50,000 on the last day of the year OR SFFA > $75,000 at any time during the year.
• Married Taxpayers Filing a Joint Return, Living in the US: Total value of SFFA> $100,000 on the last day of the year or SFFA > $150,000 at any time during the year. 
• Married Taxpayers Filing Separate Tax Returns, living in the US: Same as unmarried above. 
• There are higher thresholds for taxpayers living abroad. 

More and more countries in the European Union are signing treaties with the US to have their financial institutions report directly to the US Govt if their account holders are US Citizens. There are other countries like India and UAE that are looking for reciprocal agreements with the US Govt. 

Please contact me or a qualified tax professional if you think any of the above would apply to you. The penalties for non-compliance are very steep. There is a $10,000 penalty for non-disclosure upto a maximum value of $60,000, criminal charges may also apply. 

There are added penalties if you had undisclosed income from these SFFA. The TD F 90-22.1 and the Form 8938 BOTH have to be filed if these thresholds apply to you.

The OVDI, that is the Offshore Voluntary Disclosure Initiative can be made use of to avoid some of the penalties. There is a lot of paper work involved with the process, so make sure you know what is required of you and (I can never stress this enough), find a tax pro who knows what he/she is doing!

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com. 

Foreign Bank Account Regulations Part II

In my earlier post here, we talked about Foreign Bank Account Regulations and the importance of staying in compliance. The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010. Not only does FATCA require US Taxpayers to report financial assets in foreign countries, it also requires Financial Institutions to report directly to the IRS certain information about financial accounts held by US Taxpayers or foreign entities in which US Taxpayers have substantial interest. 

Let's first look at what most of us may encounter, the TD F 90-22.1, the Report of Foreign Bank and Financial accounts also known as FBAR.  

Who must file? :  

• If you are a US Taxpayer, that is if you are a citizen or a resident alien and 
• You had an interest in or signature authority over foreign financial accounts which had
• An aggregate value exceeding $10,000 at any time during the calender year, 

you must file Form TD F 90-22.1. The Form is due on or before the 30th of June of the year immediately following the calender year you are reporting for. 

What is a Financial Account? :

• It includes but is not limited to-securities, demand, checking, deposit, time deposit or other account maintained by a financial institution.
• It also includes commodity futures or options account;
• An Insurance Policy with Cash Value or Annuity Policy with Cash Value;
• Shares in a Mutual Fund or similar pooled fund. 

What is a Foreign Bank Account?:

• A financial account located in a foreign bank located outside the United States.
• Example 1: An account maintained with a US Bank Branch physically located OUTSIDE the US is a foreign bank account.
• Example 2: An account maintained with a Foreign Bank Branch physically located within the US is NOT a Foreign Bank account. 

Clear, so far? Okay then, moving on...there are like always, exceptions to this. The intricate details of which will depend on the kind of financial account you have with the foreign bank, but the major one that I get asked about all the time are JOINT ACCOUNTS OWNED BY SPOUSES. 

The spouse of an individual who files an FBAR is not required to file IF AND ONLY IF THE FOLLOWING CONDITIONS ARE MET:

1. All financial accounts are jointly owned;
2. ONE of the spouses is reporting them on a timely filed FBAR;
3. BOTH spouses sign the FBAR on Item 44;

If the spouses have individual accounts to which the paradigms listed in the beginning apply, each of them has to file a SEPARATE FBAR. 

Closing a foreign bank account you have with the above limits will not absolve you from your filing requirement. 

Note that no extension in time to file the FBAR is available. Do not file this form with your federal tax return. File by mailing the form to:

Department of Treasury

PO Box 32621

Detroit, MI 48232

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Consult with a tax professional for your unique needs and make sure your questions are answered. Always remember to read my disclaimer here. If you have any more questions regarding this or other tax matters, contact me at manasa@mntaxsolutionsllc.com. 

Good Accounting Habits for Small Business Owners

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The biggest headache for small business owners is getting & staying organized. If running your own business sucks up your day, being successful is going to be that much harder for you. 

Here are a few tips for you to form good accounting habits so your small business will run like a well-oiled machine. 

Keep It Separate. Sometimes your business credit card comes in handy when paying for personal expenses. One may pay it back to the business but you actually have to record an accounting transaction. It is important to keep separate bank accounts & credit cards for personal & business expenses; by doing this you will be better track your deductible business expenses. 

Call in a Pro. Accountants are your trusted allies in running your small business. Their knowledge of the profession & the tax laws will save you money & time. An accountant will find you more deductions and make sure you are penalty-free. So save yourself time, money & headaches--call in the pros!

Pencil it in Your Calender. Set aside time every week to organize your finances. The more you do this regularly, the more insight you will have into your business. You can then make timely informed financial decisions & have things ready for tax time. If you do this you will see that your stress levels will drop!

Consider Your People.  The biggest expense a business can have is labor. You have to make sure you are keeping track of the costs of wages, benefits, overtime etc. Doing this you will see that you give yourself more ways to make sure you are not over-spending on labor & money saved can be used to give your staff or yourself incentives.

Don't Forget to Get Paid. It is indeed shocking how many small business owners do not follow up on payments due to them. Keeping a regular check on invoices, tracking payments ensures that you are being paid. Also, you know who your bad/ late customers are. Knowing this can help you either avoid their business or charge them penalties. Track your invoices regularly & record payments due & paid.    

A little bit of self-promotion here folks, for Point #2. For help with your book-keeping, accounting, payroll and taxation needs, email me at manasa@mntaxsolutionsllc.com.

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For more tips and news-worthy articles, do check out my website, www.mntaxsolutionsllc.com

Missing Your W2's? What to do next!

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It's that time of the year, however cliched that sounds, when your W2 comes in the mail. The W2 as you know shows your annual taxable earnings, tax payments and other deductions. The due date for the employers to send those out was January 31st, 2013. Some employers do send those out via email as well. Whereas others still rely on the pony express errrr the regular mail. 

If you have not received yours and are anxious because you need that refund (like yesterday!!). First step, check your Email Inbox ( yeah, I know...but please read on), some emails are ignored and may have slipped down the list. Your employer might require you to log in to a separate secure website. 

Not there?..In that case contact your HR department or Employer and make sure they have the correct mailing address on file for you. Some employers wait till the last day to mail your W2, so it may still be on it's way. IRS advises you to wait for a "reasonable amount of time" which I have determined to be till mid-February. 

Picture Courtesy: theblaze.com

So the employer did send it out or worse they have gone out of business and haven't made  arrangements to send out W2's to former employees, contact the IRS at 800-829-1040. Please have the following information ready: 

• Your name, complete address, Social Security Number and phone number.
• Your Employer's (or former employer) complete address
• Dates of Employment
• Estimate of the wages earned, federal tax withheld based on your last pay-stub from the employer

If you have already taken the steps as above, that is, contacted your employer and/or the IRS, go ahead and file your tax return by the due date or file an extension with a Form 4852 , Substitute for Form W2, Wage and Tax Statement. Attach this form to the tax return. You may not be able to file this electronically and there will be a delay in processing since all the information has to be verified. 

Voila, if you receive your W2 after you have filed in the above manner. ( Believe me, this has been known to happen!) AND the information is different from what has been provided by you on the return filed, you will have to amend your tax return via Form 1040X. 

And that my friends will be a story for another post. As always, please consult a qualified tax professional for your unique situation and yes, also read my disclaimer here. 

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You can also contact me at manasa@mntaxsolutionsllc.com for further questions regarding this or other tax matters. 

The Buzz About Taxes Disclaimer

Disclaimer About My Blog Posts

Thanks SO much for stopping by my blog. Here are a few things I would like to clarify: 

• We do not have an Enrolled Agent- Client Relationship. We could change that if you so wish. Contact Details Below. 
• We cannot provide comprehensive advice on this blog, however well-researched or well-written. 
• This blog is not meant to offer legal advice. You need to consult a tax professional for questions regarding your unique situations. 
• This blog is not affiliated with my Enrolled Agent Practice, MN Tax and Business Services PLLC. 
• I am not responsible for any comments on this blog except my own. So I request you to be civil & courteous. You can then expect the same treatment from me. Or else I reserve the right to delete your comment/s. 
• The IRS requires me to give you a Circular 230 Notice: 

          In order to comply with requirements imposed by the IRS, we must inform you that any U.S. federal tax advice contained in this blog 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 that is contained in this blog.

You can contact me through the following methods:

1. Via Email: mnadig@mntaxbiz.com
2. Via Twitter: @ManasaSogNadig
3. Via Linkedin: http://www.linkedin.com/in/manasasognadig
4. Via Phone: (734) 502-2062
5. Via Fax: (734) 527-6682
6. Via Facebook:  https://www.facebook.com/MNTaxBiz

Ten Tips To Pick A Tax Preparer

Everyone agrees that taxes are getting more complicated with every passing year. In our busy lives, staying on top of things is getting very difficult. To add to this if we have to keep track of our household budget, our 401(k)'s, our mortgage & insurance rates, our financial records, and so on, it is sometimes best to leave our individual & small business taxes to professionals. A very good software is still dependent on proper data entry & understanding the bottom line. I know a lot of people who prepare their own taxes but I know of more who miss out on simple things that changed from the previous year. 

If you have to pick a professional to prepare your taxes, the Internal Revenue Service urges that you make a wise decision. Always remember, even if someone else prepares your Tax Return, the Taxpayer is still the person responsible for the contents. So choose your Tax Preparer wisely. 

Here are Ten Tips to keep in mind when you choose a tax preparer:

Check Preparer Qualifications: 
New Regulations require all paid preparers have a Preparer Tax ID Number (PTIN). They also have to take Continuing Education Classes. And for those preparers who are not Enrolled Agents, CPA's or Tax Attorneys, the IRS is phasing in new test requirements to make sure they have minimum competency requirements. These persons will be called Regd Tax Return Preparers (RTRP) once they pass the tests. (This exam has since been in litigation from January 1st, 2013. More about it here from the IRS. ) This increases the taxpayer's responsibility to check preparer credentials.

Check on the Preparer History: 
Make sure the preparer does not have a questionable history with the Better Business Bureau. Also check for any disciplinary actions and/or licensure status through the State Boards of Accountancy for CPA's; State Bar Assoc for Attorneys; and the IRS Office of Enrollment for EA's. 

Ask About Service Fees: Do not pick preparers who base their fee as a percentage of your refund. Or those who claim that they can get you larger refunds than others. All refunds due to you should be deposited into an account in your name. No preparer can deposit your refund or a part thereof into their Bank Accounts. 

Ask if Electronic Filing Is Offered:
Any preparer who prepares & files more than 10 Tax Returns MUST file returns electronically, unless the clients opts out or has to file on paper. There are more than a billion taxes filed electronically & it is a safe method. 

Make sure the Preparer is Accessible: 
If questions arise after the Tax Return is filed, make sure you can contact the Preparer. 

Provide All Records Needed to Prepare Your Tax Return: 
Preparers need to collect all paper-work from you including records & receipts. They need to ask you multiple questions to determine the best way for you to file, your total income & your deductions. NEVER accept a preparer who is willing to file your return using your last pay stub-that is against IRS e-file rules. 

Never sign a Blank Return: Run if you are asked to sign to a blank return!

Review the entire return before signing it: Make sure you understand everything before you sign the return. You should ask questions & also be comfortable with the accuracy of your Tax Return before you sign it. 

Make Sure the Preparer Signs the Tax Return & Includes their PTIN: 
Every paid tax Preparer must include their PTIN when signing the Tax Return, this is required by Law. You should also receive a copy of your Tax Return.

Report Abusive Tax Preparers to the IRS: If you suspect a Tax Preparer of fraud, they can be reported to the IRS on Form 14157. 

For more questions regarding this or other tax matters, please contact me at manasa at mntaxsolutionsllc dot com. 


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