I read an interesting article in BusinessWeek magazine entitled "Health-Care Bill Surprise: 1099 Nightmare" the first week of June and I think it is newsworthy enough that I decided to share it with you. It is yet another little gem buried deep in the new healthcare bill. Like the '3.8% "Sales Tax" on Your Home?' this provision is intended to help pay for the new healthcare bill.
The provision will require companies to report to the IRS payments of more than $600 a year to ANY vendor. That means that if your company pays more than $600 to a cell phone provider, a gas station, FedEx, the Post Office, etc... you will have to obtain their tax ID number so you can send each respective company a 1099 for those services. The motivation behind this is to capture the estimated $2 billion or more a year in taxes on income that currently goes unreported by contractors and small businesses.
The paperwork nightmare coming to small businesses is going to be huge because now the staff is going to have to track the company expenses in a brand new way; by how much is spent with each vendor. What if a small business doesn't have a staff or enough staff to keep up with this? This provision will impose extra costs on business owners who, in turn, have to pass this extra cost on to the consumer via higher prices, which is not likely in the current economic environment, or the business will simply have to absorb the cost and make less profit.
If you don't own a small business you may glance at this and decide it doesn't affect or concern you and skip reading it. However, it could very well affect you going forward and here's how. If you pay for child care, under current law, you have to provide the IRS with the child care provider's Social Security number or tax ID. Why? So that the IRS can make sure that the child care provider is reporting their income. How about the fact that you have to provide the IRS with the Social Security number for each child you plan to claim as a dependent on your taxes? You have to prove to the IRS that you have children so you can claim them as dependents. It's just another example of the government putting an extra burden on those who do things right to catch those who do things wrong.
So where am I going with this? Is it possible that the IRS will take this 1099 provision and bring it down to the consumer level? They have with child care. What will you do if the IRS starts requiring you to track every business that you spend $600 or more with? Do you have a housekeeper? Do you pay him or her more that $600 per year? Do you have a yard maintenance service? Do you pay him or her more than $600 per year? Do you spend more than $600 per year on your cell phone? Gas? Auto maintenance? The list goes on.
Do you know how to fill out a 1099? Do you know where to get a 1099? Do you track your expenses close enough to know who you need to send a 1099 to? This bill essentially forces every single businessperson to become a watchdog for the IRS. Is it so hard to believe that the next step could be to make you and I watchdogs as well? Remember what Nancy Pelosi said? "You are just going to have to pass the bill so you can find out what's in it!" Are you liking it so far? I would love to hear your thoughts. Feel free to comment below.
Friday, July 23, 2010
Wednesday, July 14, 2010
A 3.8% “Sales Tax” On Your Home?
Buried deep in the new health care law is a new and little known tax of 3.8% on the sale of your home. It is actually a tax on “unearned” net investment income, but I’ll get to that in a minute. Unfortunately, there is not much information out there about this new tax and, consequently, most of it is misinformation or outright misrepresentation.
You may have already seen an e-mail alluding to this new tax. The e-mail states that if you sell your $400,000 home you will have to pay $15,200, or 3.8%, in tax on that sale. I’m not sure whether this is an example of misinformation or misrepresentation, but this post will clear up the confusion once and for all. The truth is that only a tiny percentage of home sellers will pay the tax, but it doesn’t change the fact that this is a new tax above and beyond the existing capital gains tax.
The “Medicare Tax,” as it is called, takes effect January 1, 2013. The revenues generated from this tax will be allocated to the Medicare Trust Fund, which is part of the Social Security System, and is designed to decrease the shortage that currently exists.
As I already mentioned, the tax will apply to what is referred to as “unearned” income. Unearned income is income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. Income derived from the sale of a home is considered capital gains. Under current tax law, any gain from the sale of a principal residence that is less than $250,000 for individuals or $500,000 for married couples may be excluded from the capital gains tax. According to the IRS, to qualify for the $250k/$500k exclusion, a seller must have owned the home for at least two years, with few exceptions, and lived in the home as a primary residence for at least two years out of the last five years prior to the sale. The capital gains tax and the new “Medicare Tax” would apply only to any gain realized that is more than the $250,000/$500,000.
While the law imposes a 3.8% tax on the capital gains over the $250k/$500k exclusions in an effort to make the “wealthy” pay, the exclusion only applies to primary residences. There are a lot of “not so wealthy” individuals who own rental property, vacation property (second home) or vacant land. These properties are not shielded from this 3.8% tax increase.
Let’s look at two examples:
1) Take an “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on the $100,000 of profit (the amount over the $500,000 exclusion). Their “Medicare Tax” on the sale would amount to $3,800 ($100,000 x 3.8%) over and above the usual capital gains tax.
2) Take a single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His/her tax on the sale of that vacation home would amount to $1,900 ($50,000 x 3.8%), in addition to the usual capital gains tax.
The situation is similar in the case where someone owns a rental property. The rents received and the profit from a sale are taxed. However, the income from these sources are reduced by any expenses associated with earning that income. Thus, in the case of rents, the taxable amount would be the gross rents minus all expenses (including depreciation) incurred in operating the rental property.
Who will be subject to the new tax? “High Income” taxpayers. In this law a high income earner is defined as a “single” person with an Adjusted Gross Income (AGI) of $200,000, a married couple filing a joint return with an AGI of $250,000, or a married couple filing separately with AGI of $125,000. These income levels are even more important when you consider that they are not indexed for inflation. That means that over time more and more people may become subject to this tax, just like happened with the Alternative Minimum Tax. Over time a person’s income typically increases. Someone making $75,000 today may be making $125,000 in ten years or less. If the spouse also works they could see themselves making more than $250,000 and now be subject to a tax that was supposedly not designed to apply to them.
Hopefully, this explanation of the “Medicare Tax” is clear and easy to understand. If you have any questions please feel free to call me or comment below.
You may have already seen an e-mail alluding to this new tax. The e-mail states that if you sell your $400,000 home you will have to pay $15,200, or 3.8%, in tax on that sale. I’m not sure whether this is an example of misinformation or misrepresentation, but this post will clear up the confusion once and for all. The truth is that only a tiny percentage of home sellers will pay the tax, but it doesn’t change the fact that this is a new tax above and beyond the existing capital gains tax.
The “Medicare Tax,” as it is called, takes effect January 1, 2013. The revenues generated from this tax will be allocated to the Medicare Trust Fund, which is part of the Social Security System, and is designed to decrease the shortage that currently exists.
As I already mentioned, the tax will apply to what is referred to as “unearned” income. Unearned income is income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. Income derived from the sale of a home is considered capital gains. Under current tax law, any gain from the sale of a principal residence that is less than $250,000 for individuals or $500,000 for married couples may be excluded from the capital gains tax. According to the IRS, to qualify for the $250k/$500k exclusion, a seller must have owned the home for at least two years, with few exceptions, and lived in the home as a primary residence for at least two years out of the last five years prior to the sale. The capital gains tax and the new “Medicare Tax” would apply only to any gain realized that is more than the $250,000/$500,000.
While the law imposes a 3.8% tax on the capital gains over the $250k/$500k exclusions in an effort to make the “wealthy” pay, the exclusion only applies to primary residences. There are a lot of “not so wealthy” individuals who own rental property, vacation property (second home) or vacant land. These properties are not shielded from this 3.8% tax increase.
Let’s look at two examples:
1) Take an “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on the $100,000 of profit (the amount over the $500,000 exclusion). Their “Medicare Tax” on the sale would amount to $3,800 ($100,000 x 3.8%) over and above the usual capital gains tax.
2) Take a single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His/her tax on the sale of that vacation home would amount to $1,900 ($50,000 x 3.8%), in addition to the usual capital gains tax.
The situation is similar in the case where someone owns a rental property. The rents received and the profit from a sale are taxed. However, the income from these sources are reduced by any expenses associated with earning that income. Thus, in the case of rents, the taxable amount would be the gross rents minus all expenses (including depreciation) incurred in operating the rental property.
Who will be subject to the new tax? “High Income” taxpayers. In this law a high income earner is defined as a “single” person with an Adjusted Gross Income (AGI) of $200,000, a married couple filing a joint return with an AGI of $250,000, or a married couple filing separately with AGI of $125,000. These income levels are even more important when you consider that they are not indexed for inflation. That means that over time more and more people may become subject to this tax, just like happened with the Alternative Minimum Tax. Over time a person’s income typically increases. Someone making $75,000 today may be making $125,000 in ten years or less. If the spouse also works they could see themselves making more than $250,000 and now be subject to a tax that was supposedly not designed to apply to them.
Hopefully, this explanation of the “Medicare Tax” is clear and easy to understand. If you have any questions please feel free to call me or comment below.
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