Were You Unexpectedly Dinged By Uncle This Year?

April 21st, 2016

Rarely do I discuss taxes here.  As most of you know, I’m a CPA and do many, many doctors’ office and individual practitioner tax returns each year.

2016 was an especially hard year to be a tax preparer.  Almost all my clients owed significant money because they had not properly withheld for the tax increases of the past few years.  Taxes will be even higher in 2016, so plan now to avoid another surprise tax bill and underpayment penalty.

During the last few years higher income taxpayers are bearing more and more of the burden of the federal government.  For example, in 2013  the top one percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined.

Are you and your spouse in the top one percent?  If together you make more than $400,000, you are.

Even if you aren’t in the top percent, the AVERAGE American works until April 24 before the dollars they keep are his own…ie, the average American pays almost a third of their income into federal taxes.

What are some of the tax hikes you need to be aware of to properly plan during 2016:

1.     Professionals' are special.  Their businesses are taxed at 35 percent on the first dollar earned.  Their is NO GRADUATED brackets for their corporations.

The biggest things that physicians (or other individuals classified as professionals) must be aware of is the PROFESSIONAL SERVICE TAX.  The IRS taxes professional corporations at a higher rate than that of regular corporations.  Specifically, profits are taxed at 35 percent regardless of the amount. Corporations of nonprofessionals are taxed just 15 percent on the first $50,000 in profits.  Thus, unless you are clever with your tax planning, a professional could easily pay 20 percent more on the same income. 

So when your tax preparer tells you at year end to empty out your corporation of income, listen!

2.     If a company you invest in moves out of the country, you pay tax as if YOU sold the stock.

As more and more U.S. companies move operations to more tax friendly countries, U.S. taxpayers face tax consequences because of “tax inversions”.  The IRS considers such deals taxable events, treating them as if long-term shareholders sold their stock and booked gains — even if they opted to exchange their holdings for shares in the newly incorporated company. 

We saw some substantial taxation on unrealized gains because of Medtronic’s acquisition of Dublin-based Covidien and relocation of the company’s tax home to Ireland.  Although Medtronic reimbursed its senior management to offset the tax liability, the move cost other taxpayers up to 33% on the difference between what they paid for the stock and what it was worth at the date of the acquisition.  It’s not fun calling a retired taxpayer to tell him he owes almost $100,000 because a company he invested in moved even though he hadn’t sold any of the stock.

Moral here:  using a discount broker and making your own investment decisions could cost you big in tax dollars.

3.  If your family makes more than $250,000 a year, you pay a surtax on your savings.

In January 2013, the Affordable Care Act’s 3.8% surtax on investment income went into effect  This applies to joint returns of $250,000+ or single returns of $200,000+. 

Other investment income was also impacted as follows:

                                               Capital Gains                Dividends                 Other Investment Income

2012                                              15%                           15%                                    35%

2013+                                           23.8%                         43.4%                                 43.4%

4.  If your family makes more than $250,000 a year, your Medicare rate increases.

Also in 2013, an increase in Medicare or self-employment tax to joint returns of $250,000+ or single returns of $200,000+ went into effect. This impacted many of our clients when both spouses make less than $200,000 a year.  If you fall within this category, your Medicare withholding goes from 1.45% to 2.35%.  If you are self-employed, you will pay 3.8% instead of 2.9% in self-employment taxes.

5.     If your family pays more than $27,500 a year for health insurance, get ready to pay a 40% excise tax for your Cadillac plan.

Those with health insurance costing more than $10,200 for an individual or $27,500 for a family, have to pay a 40% percent excise tax for a “Cadillac” insurance plan.

6.    Everyone pays more because of inflation.

The tax brackets have been indexed for inflation as they are every year.  For 2016, this will mean you will pay approximately .4% more in tax.

7.    Even if you have no income, if you don't have health insurance or your health insurance doesn't qualify, you have to pay a "penalty" up to $2,085.

Tax penalties related to not having “qualifying” health insurance are going up again.  The penalty for not have the right kind of health insurance will go up again in 2016 to $695 per adult or 2.5% of your income.  The per person amount is limited to $2,085 for families without qualifying insurance.

 

Bottom line: tax planning is no longer an option.  The .4% and the .9% and the 2.5% seem like small amounts BUT when added together, the impact to your bottom line can be huge.  High income taxpayers need to work closely with both a competent financial planner and tax advisor throughout the year to avoid big surprises in 2017.

Tags: Taxes, Affordable Care Act,

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