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Back to Basics Part XXXV – Form 8959 Additional Medicare Tax and Form 8960 – Net Investment Income Tax
Filed under: Back to Basics | Tags: 0.9%, 3.8%, 500 hours, Additional Medicare Tax, alimony, Capital Gains, capital gains distributions, compressed bracket, dividend income, estates, fiduciary expenses, Form 8814, Form 8959, Form 8960, interest income, investment advisory fees, Investment Interest Expense, material participation, Net Investment Income Tax, NIIT, real estate professional, retirement plan distributions, Social Security, state taxes, tax preparation fees, tax-exempt interest income, trusts, unemployment, wages
Leave a comment Originally published in the Cedar Street Times
March 25, 2016
Forms 8959 and 8960 are two relatively new forms that started with the 2014 tax year. These are two of quite a number of tax increases that are being used to help fund ObamaCare. Both of these forms affect people with income in excess of $200,000 for Single filers or 250,000 for Married Filing Jointly.
Form 8959 is the Additional Medicare Tax. It is an additional 0.9% Medicare Part A tax on combined W-2 and self-employment wages in excess of the above stated thresholds. Note that it is not based on W-2 box 1 taxable wages, but on Medicare wages which are often higher for most people. Pretax deductions such as contributions to retirement plans are included in Medicare wages, whereas they are not included in box 1 taxable wages.
Employers have to start collecting this additional tax once your wages hit the thresholds. However, if you changed jobs during the year, the second employer will not withhold until the wages your earn with that employer reaches the thresholds. This means that you could owe additional tax when you file your tax returns for the shortfall, since the new employer and old employer do not communicate to coordinate this tax. For self-employed people, you would of course be sending in quarterly estimates of your income and self-employment tax liability, and the calculation of this new tax would be made on your income tax returns at year-end.
The Form 8960 is the Net Investment Income Tax (NIIT). Once your income meets the thresholds previously discussed, you will also have an additional 3.8% tax on all investment related income. This would include income sources such as interest income, dividend income, annuities, rents, royalties, capital gains distributions from mutual funds and capital gains from the sale of investments such as stocks and bonds. Even real estate professionals would be subject to NIIT on their own rental real estate activities, unless they meet the material participation test specifically in rental real estate, which is a separate test from time spent in real estate sales activities, for instance.
If you own an interest in a business and you are not materially participating in the business, this income will also be subject to the net investment income tax. Material participation generally means 500 hours or more during the year. The sale of rental property and even second homes are also subject to NIIT. If you sell an interest in a partnership or s-corporation and do not materially participate in the business, you will also be subject to NIIT on any gains from those sales. Investment income from your children that are taxed on your returns through Form 8814 are also subject to NIIT.
Wages, unemployment compensation, alimony, Social Security benefits, tax-exempt interest income, income subject to self-employment taxes, and income from qualified retirement plan distributions are specifically excluded from the tax.
There are also some deductions that can be used to offset NIIT. These expenses included investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.
Regarding trusts and estate, it is important to note that the thresholds for NIIT are much lower. Due to the compressed income tax bracket structure, NIIT kicks in when the trust or estate reaches the highest income tax bracket at only $12,300 of income (2015). This provides additional incentive for trustees to push income out to the beneficiaries since many trusts will be subject to NIIT, but the beneficiaries are often not subject due to the much higher thresholds for individuals.
Planning can be an important tool to lower the impact of NIIT.
If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .
Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes. Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.
Back to Basics Part XXXIV – Form 8938 – Statement of Specified Foreign Financial Assets
Filed under: Back to Basics, Foreign Reporting | Tags: FBAR, FinCen 114, foreign income, Form 8938, Statement of Specified Foreign Financial Assets, TD F 90-22.1
Leave a comment Originally published in the Cedar Street Times
March 4, 2016
For those of you living in the US (not just US citizens) with foreign bank accounts, foreign securities accounts, ownership interests in foreign corporations, partnerships, or other foreign potentially income generating assets, you may have a reporting requirement on Form 8938 – Statement of Specified Foreign Financial Assets. Failure to report on this form carries with it significant penalties, so you want to be sure you are in compliance if you have assets of this type.
You may have heard about the Report of Foreign Bank and Financial Accounts (FBAR) which is currently filed on a Form FinCen 114 with the US Treasury Department (a few years ago the form was called a TD F-90-22.1) each year. That form received a lot of press a few years ago as some of the large banks overseas cooperated with the US government to release the names of account holders living in the US, and is also tied to some of the amnesty programs you may have read about. This often conjures up images of mutli-millionaires hiding money overseas to avoid paying US taxes. Although this may be a component of it, I can assure you that it touches “normal” people as well that just happened to have foreign accounts, perhaps from living in a foreign country years ago, and still have the account, or maybe just living in the US for a few years and on a US work visa.
If you are reading this article, and thinking, “I have never heard of this before,” you likely have a relatively easy solution for the FBAR that will not result in huge monetary fines. This often consists of filing amended tax returns for the past three open tax years to report any income generated on these accounts, and filing FBARs for the past six years. But you must do this before the IRS discovers it – so do not bury your head in the sand.
Whereas the FBAR can attribute its roots in the Bank Secrecy Act passed by Congress in 1970 and is filed separately from your tax returns with the US Treasury Department, the Form 8938 has only been around since 2011, and is filed as a form with your tax returns. The Form 8938 has different reporting requirements as well. Whereas the FBAR is focused on foreign bank and securities accounts whose aggregate value of all accounts exceeds $10,000 at any point during the year, the Form 8938 is broader and includes more foreign income generating assets, and is only required if the aggregate value at year end is over $50,000 or if the maximum value at any point during the year is over $75,000 for single and married filing separate filers or $100,000 at year end/$150,000 maximum value if married filing jointly.
Since the US taxes people residing in the US on worldwide income, (and so does California), the IRS wanted a way to ensure that the income from foreign accounts was being properly included on the US tax returns. The FBAR does not do this, so the 8938 was created.
Parts I and II of the Form 8938 are a summary of the various types of specified foreign financial assets that you are reporting. Part III is a cross-reference to the forms and line numbers in the tax return where any income generated by these assets is included. Part IV is a cross-reference to foreign assets whose detail is not reported on the 8938 itself, but on other form specifically designed for those types of assets. Parts V and VI are the specific details of each account listed in parts I and II, and include things like account numbers, addresses, amounts, foreign currency conversions, etc.
You can easily download the instructions to the Form 8938 online if you would like to learn more about the reporting requirements. Even if you do not have a Form 8938 or FBAR filing requirement, you are still required to report on your US tax returns any foreign income earned by the accounts. With many countries there are also tax treaties in place to prevent double taxation.
Please keep in mind, there are complex issues involved with these reportings, and depending on the assets, you may require the assistance of an accountant or attorney.
If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .
Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes. Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.
Travis H. Long, CPA, Inc. Blog 