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Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Category: Personal Accounting

Accounting & Tax :: New York’s Metropolitan Commuter Transportation Mobility Tax Upheld

On January 14, 2014, the New York Court of Appeals, the state’s highest court, declined to hear a challenge to the Metropolitan Commuter Mobility Tax, the payroll tax levied in counties served by the Metropolitan Transit Authority. The decision permits the continuance of the tax, which was enacted in 2009, and helps fund the region’s mass transportation.


The tax is imposed on certain employers, self-employed individuals and partners in a partnership conducting business within the Metropolitan Commuter Transportation District, including the counties of Duchess, Orange, Putnam, Rockland, Westchester, Nassau, Suffolk and the boroughs of New York City.


Local county executives have fought hard to reverse this tax declaring it an undue burden on local businesses, especially those whose employees never use MTA services such as railroads, subways and buses. The MTA states that the fees are necessary to reduce costs. The tax imposes an up to 34-cent tax for every $100 of payroll for large companies with an annual payroll more than $1.25 million and on self-employed individuals and partners.


This tax was first challenged in August 2012 when the New York State Supreme Court found the tax unconstitutional. New York State immediately appealed this decision and in June 2013 the New York Appellate Court reversed the Supreme Court finding the tax to be constitutional. The final appeal to the Court of Appeals and their decision to not hear the case, essentially leaves the tax as a valid tax and good law. All taxpayers and employers must continue to comply with this law as it is in full force and effect.


The State had previously implemented a streamlined appeal process to handle protective refund claims that were anticipated as uncertainty about this tax continued during the appeals process. All of these claims are now null and void.

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Accounting & Tax :: 2013 Schedule D Forms and Form 8949 Contain Sales/Exchange Reporting Changes

Final versions of the 2013 Forms 1040 Schedule D, 1120 Schedule D and 8949 have been released by the IRS. There have been a few changes to the aforementioned forms regarding how sales and exchanges of capital assets are reported. Form 8949 is used to report sales and other dispositions of capital assets. Unlike schedule D, Form 8949 lists every sale/disposition and separates the totals based on how they were reported to the taxpayer. The totals on Form 8949 are then brought forward to Schedule D. In 2013 both individuals and businesses can look for the following changes to these forms:


• Certain Transactions can be omitted from Form 8949
In previous years, Form 8949 has required that every sale/disposition be reported separately, notwithstanding the following exceptions:


1. Taxpayers can attach a separate statement with the transaction detail in a format prescribed by form 8949.

2. Corporations, exempt organizations and partnerships with a large number of transactions were allowed to omit the detail and indicate “Available upon request.”

3. The third exception has been added for the 2013 tax year. Taxpayers may aggregate and report qualifying transactions directly on line 1a (Short-Term Transactions) or line 8a (Long-Term Transactions) of Schedule D. In order to be deemed a qualifying transaction, the following criteria must be met:

a. The taxpayer must receive a Form 1099-B (or substitute statement) that shows basis was reported to the IRS and does not show a nondeductible wash sale loss in box 5.

b. There may also be no adjustments made to the basis or type of gain or loss (short-term or long-term) reported on Form 1099-B (or substitute statement).

Taxpayers who qualify to use this new exception and who also qualify for Exception 1 or Exception 2 can use both (i.e., Exception 3 plus either Exception 1 or Exception 2).

• Change in Reporting by Electing Large Partnerships
Prior years required both corporations and electing large partnerships to report their share of gains and losses from pass-through entities on Form 8949. In 2013, electing large partnerships will report their share of gain or loss on Schedule D.

• Estates and Trusts Must Use Form 8949
Filing Form 8949 for estates and trusts has not been a requirement until 2013. Estates and trusts will now be required to report capital gain transactions on Form 8949. In previous years, all capital transactions at the estate and trust level were reported on Form 1041 Schedule D.

The 2013 changes to Forms 1040 Schedule D, 1120 Schedule D and 8949 allows taxpayers a simplified method for reconciling capital gain transactions.

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Tax Provisions Expiring in 2013

Many of these temporary tax provisions were previously extended as part of the American Taxpayer Relief Act. Temporary tax provisions that are regularly extended, for one to two years, are referred to as “tax extenders.” The President’s 2014 Budget identifies several expiring provisions that should be permanently extended, including the research and experimentation (R&D) tax credit, enhanced expensing for small businesses, renewable energy credits, the work opportunity tax credit (WOTC), the deduction for state and local sales taxes, the exclusion of discharge of principal residence indebtedness, and the tax deduction for energy efficient commercial buildings.


Expiring Individual Provisions

All but one of the individual provisions scheduled to expire at the end of 2013 have been extended at least once.


• Above-the-Line Deduction for Certain Expenses of Elementary and

  Secondary School Teachers

• Deduction for State and Local Sales Taxes

• Above-the-Line Deduction for Qualified Tuition and Related Expenses

• Premiums for Mortgage Insurance Deductible as Qualified Interest

• Parity for Exclusion for Employer-Provided Mass Transit and

  Parking Benefits

• Exclusion of Discharge of Principal Residence Indebtedness

  from Gross Income for Individuals

• Credit for Health Insurance Costs of Eligible Individuals


Expiring Business Provisions

All but one of the business provisions scheduled to expire at the end of 2013 have been extended at least once. Most of the business provisions scheduled for expiration in 2013 have been extended more than once. Long-standing provisions that are scheduled for expiration include the research tax credit, and the work opportunity tax credit.

• Tax Credit for Research and Experimentation Expenses

• Work Opportunity Tax Credit

• Indian Employment Tax Credit

• 15-Year Straight-Line Cost Recovery for Qualified Leasehold,

  Restaurant, and Retail Improvements

• 7-Year Recovery for Motorsport Racing Facilities

• Employer Wage Credit for Activated Military Reservists

• Special Expensing Rules for Film and Television Production

• Special Rules for Qualified Small Business Stock

• Increase in Expensing to $500,000 / $2,000,000 and Expansion

  of Definition of Section 179 Property

• Bonus Depreciation

• Reduction in S Corporation Recognition Period for Built-In Gains Tax

• Election to Accelerate AMT Credits in Lieu of

  Additional First-Year Depreciation

• Low-Income Housing Tax Credit (LIHTC)

• Three-Year Depreciation for Race Horses Two Years or Younger


Expiring Charitable Provisions

• Enhanced Charitable Deduction for Contributions of Food Inventory

• Tax-Free Distributions From Individual Retirement Accounts for

  Charitable Purposes

• Basis Adjustment to Stock of S Corporations Making Charitable

  Contributions of Property

• Special Rules for Contributions of Capital Gain Real Property

  for Conservation Purposes


Expiring Energy Provisions

• Production Tax Credit (PTC) or the Investment Tax Credit (ITC)

  in Lieu of the PTC

• Special Rule to Implement Electric Transmission Restructuring

• Credit for Construction of Energy Efficient New Homes

• Energy Efficient Commercial Building Deduction

• Mine Rescue Team Training Credit

• Election to Expense Mine-Safety Equipment

• Credit for Energy Efficient Appliances

• Credit for Nonbusiness Energy Property

• Alternative Fuel Vehicle Refueling Property

• Incentives for Alternative Fuel and Alternative Fuel Mixtures

• Incentives for Biodiesel and Renewable Diesel

• Credit for Electric Drive Motorcycles and Three-Wheeled Vehicles


Other Expiring Provisions Include:

• the expiration of the New Markets Tax Credit and

• the Tax Exempt Bond Financing for NY Liberty Zone bonds.


Taxpayers may want to consider taking advantage
of these provisions while they still exist as
part of any year-end tax planning.


In addition, taxpayers who have been utilizing these techniques may want to prepare for the possibility that they will not be available for the year 2014, and adjust withholding or estimated tax payments for 2014 accordingly. In order for these tax provisions to be renewed, Congress would need to pass new legislation to extend these to future years. There is a cost for extending these provisions which are estimated by the Congressional Budget Office to be in excess of $900 billion. With the present sequestering, there remains uncertainty related to extensions of these expiring items.

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Accounting & Tax :: 2014 Income Tax Bracket Increase Estimates

Alas, inflation is put to good use – taxpayers will be seeing its benefits in the form of tax relief in 2014. The mandatory annual inflation-adjustments as provided under the Tax Code should provide relief.


The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013 will at least guarantee in most cases, a little more money for you. ATRA permanently extended the Bush administration tax cuts and other provisions that previously hinged on congressional action, such as the alternative minimum tax (AMT) exemptions. This eliminates the uncertainty that comes every time tax cuts approach possible elimination and are at the mercy of Congress. ATRA also indexes tax brackets for tax years after 2013.


Indexing brackets during inflation lowers tax bills by including more of people’s incomes in lower brackets. The formula used in indexing showed a slightly lower amount of inflation this year over last, just over 1.5 percent. This amount is slightly below the 2.5 percent amount used last year and far below the 3.8 percent inflation factor used to set 2012 tax amounts. Although some 2014 taxes will stay the same as they were for 2013, such as the $14,000 gift tax annual exclusion and the $5,500 limit on IRA contributions, many will change slightly for inflation in 2014.


Many taxpayers will experience modest tax savings generated by indexing of the 2014 individual income tax rate brackets. Some examples include:


1. A married couple filing jointly with a total taxable income of $100,000 should expect to pay $145 less income taxes in 2014 compared to the same income for 2013.

2. A single filer with taxable income of $50,000 should pay $72.50 less income taxes in 2014 as compared to the same income for 2013.


When you add to those savings, the additional tax savings realized in most cases by slightly higher 2014 standard deduction and personal exemption amounts, as well as amounts that might be claimed from an increase in the income ceilings imposed on tax benefits, such as education credits, individual retirement account (IRA) contributions, and more. When combined, inflation-based tax savings for the 2014 tax year can become substantial.


Higher-Income, Higher Taxes

The 2013 highest tax brackets – currently at $450,000 or more for married filing joint taxpayers, $425,000 for taxpayers filing as head of household, single filers at $400,000 and married couples filing separately at $225,000 – will likely go up. For 2014 these amounts are projected to rise to $457,600, $432,200, $406,750 and $228,800 respectively.


AMT Exemptions Indexed

It is projected that for 2014 the AMT exemption will be adjusted upward for married joint filers to $82,100, from $80,800 in 2013, single filers & heads of household to $52,800, up from $51,900 in 2013.


Standard Deduction, Personal Exemption Rise

The standard deduction and personal exemption amounts are also subject to indexing. Projections for 2014 indicate that the trend will continue, with increases across the board. The standard deduction is expected to rise in 2014 from $6,100 to $6,200 for single filers, $8,950 to $9,100 for heads of household and $12,200 to $12,400 for married couples filing joint.


Most taxpayers will see a boost in their allowed personal exemption amounts as well even for higher income brackets. The anticipated 2014 phase out range for personal exemptions begins at $305,050 for joint filers and $254,200 for single filers.


The IRS usually releases the official annual inflation adjustments by December each year. The projected amounts above were based on the relevant inflation data released September 17, 2013, by the US Department of Labor and should not be used for income tax returns or other federal income tax related purposes until confirmed by the IRS later this year.

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Financial & Wealth :: Save Now or Save Later?



Most people have good intentions about saving for retirement. But few know when they should start and how much they should save.






Sometimes it might seem that the expenses of today make it too difficult to start saving for tomorrow. It’s easy to think that you will begin to save for retirement when you reach a more comfortable income level, but the longer you put it off, the harder it will be to accumulate the amount you need.

The rewards of starting to save early for retirement far outweigh the cost of waiting. By contributing even small amounts each month, you may be able to amass a great deal over the long term. One helpful method is to allocate a specific dollar amount or percentage of your salary every month and to pay yourself as though saving for retirement were a required expense.


If you have trouble saving money on a regular basis,
you might try savings strategies that take money
directly from your paycheck on a pre-tax or after-tax basis,
such as employer-sponsored retirement plans
and other direct-payroll deductions.


Here’s a hypothetical example of the cost of waiting. Two friends, Chris and Leslie, want to start saving for retirement. Chris starts saving $275 a month right away and continues to do so for 10 years, after which he stops but lets his funds continue to accumulate. Leslie waits 10 years before starting to save, then starts saving the same amount on a monthly basis. Both their accounts earn a consistent 8% rate of return. After 20 years, each would have contributed a total of $33,000 for retirement. However, Leslie, the procrastinator, would have accumulated a total of $50,646, less than half of what Chris, the early starter, would have accumulated ($112,415).* This example makes a strong case for an early start so that you can take advantage of the power of compounding. Your contributions have the potential to earn interest, and so does your reinvested interest. This is a good example of letting your money work for you. If you have trouble saving money on a regular basis, you might try savings strategies that take money directly from your paycheck on a pre-tax or after-tax basis, such as employer-sponsored retirement plans and other direct-payroll deductions.


Regardless of the method you choose, it’s extremely important to start saving now, rather than later. Even small amounts can help you greatly in the future. You could also try to increase your contribution level by 1% or more each year as your salary grows. Distributions from tax-deferred retirement plans, such as 401(k) plans and traditional IRAs, are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if withdrawn prior to age 59½.



*This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investment. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return involve a higher degree of investment risk. Taxes, inflation, and fees were not considered. Actual results will vary.



The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.This material was written and prepared by Emerald.
© 2013 Emerald Connect, LLC All rights reserved

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Accounting & Tax :: How to Use the Internal Revenue Service Rules and Regulations to Achieve Estate Tax Savings

The use of trusts known as Intentionally Defective Grantor Trusts (IDGT) may provide the opportunity for estate tax savings by using the IRS rules and regulations in your favor. In this instance, the term defective does not mean that it does not work or it is substandard like a defective toy or defective product. This type of trust is specifically drafted to be an irrevocable trust for gift and estate purposes. The carefully-drafted document includes certain selected provisions under the Internal Revenue Service Code 671 to 677 that cause the trust to be a grantor type trust income tax purpose. For example, a provision to allow the substitution of property by the grantor can cause the trust to be considered a grantor type trust. A gift to this type of trust is considered completed and reportable for gift tax purposes. The provision or the intentional defect results in income earned from the gift being taxable to the grantor.


“…With proper consultation with a skilled estate
and trust attorney and coordination with your tax professional you may want to consider the use of Intentionally Defective Grantor Trust to achieve tax savings and
maximize the transfer of property to your heirs.”


At first glance this may not be considered a great bargain to the donor. However, if the donor’s intention is to reduce the taxable estate over a period of years, the requirement to pay the income tax on the earnings of the grantor trust reduces the donor’s estate. Revenue Ruling 2004-64 further reinforced the benefit by stating the grantor’s payment of the income taxes that was not distributed to the grantor is not a taxable gift. Also, the current trust income tax rate thresholds are substantially lower resulting in higher taxes on accumulated trust income. For taxable years beginning in 2013, a trust’s highest tax rate on ordinary income is 39.6% when exceeding $11,950 of taxable income. During 2013, a single taxpayer reaches the 39.6% rate on the excess of $400,000 taxable income. Avoiding the compressed brackets result in tax savings.


If the value of the property contributed to the IDGT trust is below the available applicable lifetime exclusion amount there is no gift tax due. The lifetime gift tax exclusion for 2013 is $5,250,000.
Another opportunity to achieve estate tax savings is when the grantor can sell appreciating property to the IDGT. Under IRS Revenue Ruling 85-13, the sale is considered a nonevent and is not recognized for income tax purposes. The interest earned and interest paid is disregarded for income tax purposes. Capital Gain is not recognized and the trust takes the grantor’s basis in the assets. By coupling the sale with a promissory note the seller can fix the value of the property at the time of the sale. The remaining value of the promissory note at the time of death is includible in the grantor’s estate. The benefit is that the property sold the IDGT is allowed to continue to appreciate outside of the grantor’s taxable estate and the value to the estate is in effect frozen at the time of the sale.
When using the IDGT, there are many technical issues in drafting and complying with the law. Due care is required to make sure you are within the guidelines of IRS rules and regulations. Also, not all property is ideal for this type of trust. Closely held business interests that generate cash flow are the favored property for this type of transaction. Whereas, marketable securities contributed to the trust may not achieve the desired result.
The fans of the estate tax are not fond of this estate planning technique and routinely plot to restrict or to eliminate their use. But in the meantime, with proper consultation with a skilled estate and trust attorney and coordination with your tax professional you may want to consider the use of Intentionally Defective Grantor Trust to achieve tax savings and maximize the transfer of property to your heirs.


Contact G.R. Ried Wealth Management Services to discuss estate planning strategies.

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Financial & Wealth :: What Is a Required Minimum Distribution?

A required minimum distribution (RMD) is the annual amount that must be withdrawn from a traditional IRA or a qualified retirement plan (such as a 401(k), 403(b), and self-employed plans) after the account owner reaches the age of 70½. The last date allowed for the first withdrawal is April 1 following the year in which the owner reaches age 70½. Some employer plans may allow still-employed account owners to delay distributions until they stop working, even if they are older than 70½. RMDs are designed to ensure that owners of tax-deferred retirement accounts do not defer taxes on their retirement accounts indefinitely.

You are allowed to begin taking penalty-free distributions from tax-deferred retirement accounts after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution for that year. Annual RMDs must be taken each subsequent year no later than December 31.


The RMD amount depends on your age, the value of the account(s), and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your account balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each account that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.


Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax. Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.


The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.


This material was written and prepared by Emerald.
© 2013 Emerald Connect, Inc. All rights reserved.

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Additional Medicare Tax

As 2013 comes to an end, employers, employees and self-employed individuals should make sure they are complying with the new 0.9 percent additional Medicare tax.


This new rule was effective at the beginning of 2013, but the effects will not be fully felt until wages reach a threshold level which, for many employees, will not occur until the final months of the year. This additional tax will also need to be considered when processing year-end bonuses.
Beginning in 2013, employers were required to withhold an additional 0.9 percent Medicare tax on the wages paid to any employee whose wages exceed $200,000.
The tax applies only to employees and self-employed individuals, not employers, and is in addition to the 1.45 percent / 2.9 percent (regular) Medicare tax that all wage earners/self-employed individuals pay.
The required withholding of the additional Medicare tax may result in over- or under- withholding of the actual tax owed. This is because, employers are required to withhold on wages paid in excess of $200,000 regardless of the employee’s filing status. The actual threshold for the additional tax is $250,000 for joint filers.


Assume that an employee’s wages are $220,000 annually and his/her spouse earns $150,000, and they file a joint tax return. The employer will be required to withhold the additional Medicare tax on the $20,000 of wages that is in excess of the $200,000 withholding threshold. The spouse’s employer will not withhold additional Medicare tax because their earnings do not exceed $200,000. But, together, the employee and spouse will owe additional Medicare tax on $120,000 (the excess of the combined earnings over $250,000.)
In order to avoid under-withholding, such as in the above situation, taxpayers should consider filing a new form W-4 with their employers to request that additional income tax be withheld, or alternatively, make estimated tax payments to make up the difference.
The new withholding rules will require that employers withhold the additional Medicare tax even if employees have no additional Medicare tax liability. Since this is a payroll requirement, employees cannot request that the employer reduce the required withholding.


Assume an employee earns $220,000 annually, and the spouse does not work. The couple file a joint tax return. The employer is required to withhold additional Medicare tax on the $20,000 of the $220,000 compensation. However, the employee and spouse will not owe any additional Medicare tax because the joint annual salary is under $250,000, the threshold for joint filers. In this example the taxpayers will have to claim a refund for those amounts on their tax return.
Between now and the end of the year, employers should be checking their payroll systems to ensure they have properly begun to withhold from their high-earners. Employees should be making some calculations to see if they need to increase their withholding and self-employed individuals should be planning, with their tax return preparers, to be sure estimated tax payments are being made. Paying taxes now, can minimize penalties and interest that apply for failure to pay the additional Medicare tax.

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Debt Crisis Averted: But What’s Next?

Working to reach consensus before the October 17th debt ceiling deadline, the U.S. Congress reached an agreement to avoid a historic, and potentially catastrophic, lapse in the government’s ability to borrow money. The agreement averted an unprecedented debt default and will enable the government to re-open many of its services after a two-week shutdown. The agreement funds federal government agencies until January 15, 2014 and extends U.S. borrowing authority until February 7, 2014 although the Treasury Department may be able to temporarily extend its borrowing ability beyond that date should Congress fail to act early next year. While the agreement is good news, the deal reached by Congress is only a temporary solution to the nation’s debt ceiling challenges. The potential for another showdown in Congress, and shutdown of the government’s borrowing power, looms in a few short months when this temporary agreement expires. The agreement was only a stop-gap measure, Americans are faced with two real prospects for early next year: another government shutdown on January 15, 2014 and another debt ceiling crisis on February 7, 2014. Moreover, some Capitol Hill insiders believe that, unless Congress aligns on a final, “once and for all” solution to the debt-ceiling crisis, we could be facing many more Congressional showdowns and deadlines — perhaps on a monthly basis and through the next election.

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Accounting & Tax :: Year-end planning: reducing exposure to the new 3.8% surtax on unearned income – Part I

Year-end tax planning for 2013 includes a new and unwelcome complication: the 3.8% surtax on unearned income. This two-part article takes a look at year-end moves that can be used to reduce or eliminate the impact of this surtax. Part I, in this article, highlights the new code regarding the surtax and overall year-end strategies for coping with it, and includes specific strategies for taxpayers with interests in passive activities.



For tax years beginning after Dec. 31, 2012, certain unearned income of individuals, trusts, and estates is subject to a surtax on “unearned income” (i.e., it’s payable on top of any other tax payable on that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax” (NIIT), for individuals is 3.8% of the lesser of:


(1) net investment income (NII), or

(2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).


MAGI is adjusted gross income (AGI) plus any amount excluded as foreign earned (net of the deductions and exclusions disallowed with respect to the foreign earned income).


For an estate or trust, the surtax is 3.8% of the lesser of (1) undistributed NII or the excess of adjusted gross income (AGI) over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.


For 3.8% surtax purposes, NII is investment income less deductions properly allocable to such income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in NII.


Investment income is:


… gross income from interest, dividends, annuities, royalties, and rents, unless derived in the ordinary course of a trade or business to which the 3.8% surtax doesn’t apply,

… other gross income derived from a trade or business to which the 3.8% surtax contribution tax does apply, and

… net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the Medicare contribution tax doesn’t apply.


The 3.8% surtax applies to a trade or business only if it is a passive activity of the taxpayer or a trade or business of trading in financial instruments or commodities. Investment income doesn’t include amounts subject to self-employment tax), distributions from tax-favored retirement plans (e.g., qualified employer plans and IRAs), or tax-exempt income (e.g. earned on state or local obligations).


The surtax doesn’t apply to trades or businesses conducted by a sole proprietor, partnership, or S corporation (but income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax).

Gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as NII only to the extent of the net gain or loss that the transferor would take into account if the entity had sold all its property for fair market value immediately before the disposition.

The tax does not apply to: nonresident aliens (special rules apply to nonresident aliens married to U.S. citizens or residents); trusts all the unexpired interests in which are devoted to charitable purposes; trusts exempt from tax under; or charitable remainder trusts exempt from tax under. (Also exempt are trusts treated as “grantor trusts” and trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).

Specific Year-End Moves to Reduce Exposure to Surtax

Reexamine passive investment holdings. The 3.8% surtax applies to income from a passive investment activity, but not from income generated by an activity in which the taxpayer is a material participant. One subject a “passive” investor should explore with a tax adviser knowledgeable in the passive activity loss (PAL) area is whether it would be possible (and worthwhile) to increase participation in the activity before year-end so as to qualify as a material participant in the activity.


In general,  a taxpayer establishes material participation by satisfying any one of seven tests, including: participation in the activity for more than 500 hours during the tax year; and participation in the activity for more than 100 hours during the tax year, where the individual’s participation in the activity for the tax year isn’t less than the participation in the activity of any other individual (including individuals who aren’t owners of interests in the activity) for the year. Special rules apply to real estate professionals.


Becoming a material participant in an income-generating passive activity wouldn’t make sense if the taxpayer also owns another passive investment that generates losses that currently offset income from the profitable passive activity.


Taxpayers that own interests in a number of passive activities also should reexamine the way they group their activities. A taxpayer may treat one or more trade or business activities or rental activities as a single activity (i.e., group them together) if based on all the relevant facts and circumstances the activities are an appropriate economic unit for measuring gain or loss for PAL purposes. A number of special “grouping” rules apply. For example, a rental activity can’t be grouped with a trade or business activity unless the activities being grouped together are an appropriate economic unit and a number of additional tests are met. And real property rentals and personal property rentals (other than personal property rentals provided in connection with the real property, or vice versa) can’t be grouped together.


Once the taxpayer has grouped activities, he can’t regroup them in later years, but if a material change occurs that makes the original grouping clearly inappropriate, he must regroup the activities.


Proposed reliance regs issued late last year provide a regrouping “fresh start” allowing qualifying taxpayers to regroup their activities for any tax year that begins during 2013 This would apply to the taxpayer without regard to the effect of regrouping (i.e., they have NII and the applicable income threshold is met). A taxpayer may only regroup activities once, and any regrouping will apply to the tax year for which the regrouping is done and all later years. (Reg. § 1.469-11(b)(3)(iv)) The regrouping must comply with the disclosure requirements.

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