Newsletter Topics

2014 Net Investment Income

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NET INVESTMENT TAX

 

There is a 3.8% additional tax for investment income (ordinary dividends, interest, annuities from non-qualified plans, royalties, net rental income & capital gains) when the modified adjusted gross income is over $250,000 for married filing joint ($200,000 if single or head of household, $125,000 if married filing separate).  That is the bottom line of the front of your personal tax return AGI less some adjustments for foreign taxes (the literature refers to this as MAGI (Modified Adjusted Gross Income).

 

Let’s assume in computing TAXABLE income of $255,000 we used itemized deductions and personal exemptions totaling $30,000.  So, the AGI = $460,000.

Let’s assume the ONLY investment income is the above example of $175,000 LTCG.

 

In the above example, the tax might apply to $460,000 - $250,000 = $210,000.  BUT, since LTCG is $175,000, the tax applies only to the $175,000.  Again, this assumes the only investment income is the $175,000 LTC

2014 Estimated Tax - Should I Pay It?

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2014 Estimated Tax – Sould I Pay It?

Depends on what type taxpayer you are.

Are you

                Wanting to pay in the absolute minimum such that next April you may owe a bunch but with no penalty?

                Or, are you wanting to pay in during the year such come next April 15th you are about even?

 

Example

                In 2013 (most recent prior year) your TOTAL TAX (line 61 Form 1040) is $7,616.  But, your 2014 is much higher and your total tax is projected to be $92,059.  If you pay in $7,616 thru federal withholding on a W2, or make 4 estimated timely payments totaling $7,616, or some combination thereof, then you would owe the difference of $84,443 on April 15th and it would be penalty free!  Why, because you meet one of the penalty exceptions based on prior year income and tax paid.  This one says…. “your honor, I did not know what I was going to make so I paid in at least last year’s total tax”.

                If you want to pay all of the $92,059 in the form of a W2 by year end, your employment taxes would be based on a significantly higher W2… your FICA (Social Security & Medicare) would be very high since your gross would be over $200,000.

                If this additional income was earned in December, 2014, we can annualize the penalty computation (another exception) and get you out of the penalty but the balance would all be due by January 15, 2015.

                Personally, I like the first part of the example but it is your choice… both are legal and without penalty.

Veterinary Cost Deductible?

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YES for a service dog who helps the visually impaired and other people with physical disability.  This includes the cost to purchase the service dog, training, dog food, grooming, etc.
 
This is a MEDICAL EXPENSE.  for 2014, this is done on Schedule A subject to the total medical being greater than 10% of Adjusted Gross Income (or 7.5% of AGI if 65 or older).

Life Estate Taxes to Seller

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Tax Implications to the Seller

The sale of a life estate in the home is considered a partial sale of an interest in real estate subject to income tax on any gain realized. The sale would qualify for the homestead exemption under Section 121 of the Internal Revenue Code that allows for an exclusion of gain in the amount of $250,000 for a single individual ($500,000 for a married couple) as long as the requirements of the section are met (lived in two out of last five years). Any portion of the exclusion amount not utilized on the sale of the life estate can be used later.

AND, even if you did not live it in two out of last five years, there is a healthy kind of pro-rated exclusion possibility.

This really means the seller is reducing their basis in the property.

That is the answer that would apply to most situations.

Is 2014 PMI tax deductible?

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PMI is Private Mortgage Insurance.  It is a premium paid by the homeowner to lower the risk of the mortgage holder since equity % is below their requirement (generally 20% required).
 

So, is PMI tax deductibe in 2014?

 

MAYBE.  So many of the laws for the last couple of years have been unknown until December, and then made retroactive by Congress.

 

American Taxpayer Relief Act of 2012 extended this provision (deducting MIP) until the end of 2013 as part of fiscal cliff negotiations.

 

But it expired in 2014, and unless the Senate Finance Committee’s tax extenders package (EXPIRE Act of 2014) gains approval, homeowners won’t be able to deduct PMI paid this year (or next).

 

If it does pass, it will apply to mortgage insurance premiums paid in 2014 and 2015…. At least that is my guess.

 

Is that answer ambiguous enough?

 

Lonnie