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Tax Updates You Should Know
Are you ready for tax season? Here are a few recent changes that could affect you or your clients this year.
March 19, 2014
There’s good news and less-good news for real estate practitioners when it comes to tax filing this season. The IRS has simplified the home office deduction and increased the available deduction for using your car to drive buyers to and from listings. But some higher-income taxpayers will feel the sting of the new investment income surtax. Here’s what you need to know about the three changes this year.
Simplified Home Office Deduction
The IRS now gives you a choice in how to claim the deduction for your home office. You can calculate it the way you always have, based on the percentage of your home dedicated to your business activities, which requires you to track expenses such as utilities, insurance, and depreciation. Or you can use the IRS’s new simplified method, under which you take a straight $5 per square foot deduction, up to 300 square feet, for a maximum total deduction of $1,500. Which method should you use? Baker, whose client base includes many real estate brokers and sales associates, says you should run your numbers both ways and apply the calculation that’s most advantageous to you. “The simplified method is electable on a year-by-year basis,” says Baker.
Increased Mileage Deduction
The IRS adjusts how much you can deduct for business mileage each year, affected by fluctuations in gas prices. For your 2013 filing, the deductible standard mileage rate has increased a penny to 56.5 cents per mile. That doesn’t sound like a lot, but Peter Baker, a certified public accountant in Washington, D.C., points out that for every 10,000 business miles you drive, that’s an additional $100 in deductions. In real estate, those miles can add up quickly.
Net Investment Income Surtax
A new 3.8 percent surtax on net investment income for high-income filers takes effect with the 2013 filing. Although a small percentage of home sales can trigger the surtax for individuals with modified adjusted gross income exceeding $200,000 or $250,000 for married couples filing jointly, it is not a real estate transfer tax. Calculating the tax can be complicated and is best done with the assistance of a professional tax adviser, but, in short, if your income exceeds the threshold and you have non-earned or investment income, including net rents and capital gains from the sale of property (including from the sale of a principal residence), the net investment income tax could apply. Keep in mind how the sale of a principal residence factors in: The $250,000 to $500,000 in potential capital gains exclusion is key in determining whether the surtax kicks in. If a house is sold for a gain of more than $500,000 (that’s gain, not sales price), then the $500,000 is excluded ($250,000 for a single filer) to arrive at the taxable gain. For a realized gain of, say, $530,000, only $30,000 is considered investment income under the IRS rules.
0.9 Percent Medicare Tax
The health reform law also created a 0.9 percent Medicare tax, also known as the “additional Medicare tax,” because it is assessed in addition to the existing 2.9 percent Medicare tax, which applies to your earned wages, compensation, and self-employment income. The additional tax is applied to earned income in excess of the applicable threshold amount for your filing status, generally $200,000 for a single filer and $250,000 for joint filers. Thus, if your earned income exceeds that threshold, your additional Medicare tax of 0.9 percent is applied to your excess income. If you’re an upper-bracket taxpayer, the combined Medicare tax impact (2.9 percent and 0.9 percent) is raised to 3.8 percent, not to be confused with the 3.8 percent net investment income tax.
Individual Health Care Mandate Penalty
Another important change concerns the year 2014 but not your 2013 tax filing, and that’s the penalty the IRS will impose on you if you don’t have health insurance by March 31 of this year, which is the end of the open enrollment period. The penalty is $95 per uninsured person in your household (half that amount for each uninsured dependent under age 18), capped at three dependents, or 1 percent of your taxable household income, whichever is greater.
Not any insurance will do. It has to be insurance that meets the law’s “minimum essential coverage” requirements, generally what’s known as a bronze, silver, gold, or platinum plan. These plans differ in their cost and the deductible amounts, but they’re all considered major medical plans that meet the law’s requirements.
New Bracket for Top-Income Households
If you’ve had a successful 2013—so successful, in fact, that you find yourself in the highest tax bracket—be prepared to pay more than you did last year. That’s because in the American Taxpayer Relief Act of 2012, Congress created a 39.6 percent bracket for taxpayers whose adjusted gross income exceeds $400,000 for a single filer or $450,000 for joint filers. Last year, the highest tax bracket was 35 percent, so the increase is significant. “The good news is that, for 98 percent of taxpayers, the Bush-era tax cuts were made permanent,” says Baker. Under the Bush-era tax structure, there are six brackets, of 10, 15, 25, 28, 33, and 35 percent. The law adds the 39.6 percent as its seventh bracket.