Archive for the ‘Form 8814’ Tag

Back to Basics Part XXXV – Form 8959 Additional Medicare Tax and Form 8960 – Net Investment Income Tax

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.

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Back to Basics Part XXVIII – Forms 8814 and 8615 – Reporting a Child’s Investment Income/Kiddie Tax

Originally published in the Cedar Street Times

November 27, 2015

 

In order to prevent people in higher tax brackets than their children from shifting money into their children’s names in order to pay tax at a lower rate, “Kiddie Tax” rules were enacted.  The government also allows you to simplify reporting in some cases where filing a separate return for children with a small amount of income is burdensome.

The quick summary is that if your child has less than $1,050 of unearned income (and assuming there is not enough earned income to trigger a filing requirement), there will be no tax paid on the unearned income, and nothing to file.

If there is over $1,050 and $2,100 of unearned income, the amount will be taxed at the child’s rate.  In this case , the child can file his or her own tax return or the parent has the option of filing a Form 8814 – “Parent’s Election to Report Child’s Interest and Dividends” to avoid filing a separate return for the child, and just report the tax on the parents’ return.

If the child has over $2,100 of unearned income, the parent can still file either way, but the amount over $2,100 will be taxed at the parents’ rate.  If the parents elect to file on their return using Form 8814, the calculation to tax at the parent’s rate for the income over $2,100 is included on that form.  If a return is filed for the child, instead, then a Form 8615 – “Tax for Certain Children Who Have Unearned Income” will need to be filed with the child’s return to perform the additional tax calculations.

In order to qualify to File Form 8814, your dependent child would have to be under age 19 (or under age 24 if a full-time student during at least five months of the year) to qualify.  A quirky rule to watch out for is if you have a child with a January 1 birthday.  In this case, on December 31 of each year they are considered to be another year older.  So if your child turned 18 on January 1, 2015, the child would be considered 19 at the end of the day on December 31 and thus not under age 19 for tax year 2015. (They are the only birthday that gets the short-end of the stick!)

Unearned income is defined as interest, tax-exempt interest, dividends, capital gains distributions from mutual funds, net capital gains from sales, rents, royalties, taxable Social Security or pension benefits,  taxable scholarships, unemployment income, alimony, and the like.    Note that capital gains distributions come from mutual funds, and they represent your share of the buying a selling inside the mutual fund which you have no control over.  The short-term sales actually get reported as dividends, and the long-term sales get reported as capital gains distributions.  Net capital gains would be the aggregate of your  gains and losses from the direct sale of a particular stock or bond, or the mutual fund itself in your account.

As summarized earlier, if your child has over the $1,050 of unearned income, you may wish to simplify and not file a separate return for the child.  The parents may elect to file (with the parents’ tax return) a Form 8814 – “Parents’ Election to Report Child’s Interest and Dividends” if  the child’s only unearned income was from interest, dividends, and capital gains distributions (note that rents, scholarships, unemployment, etc. are not included) and his or her gross income is less than $10,500.   Otherwise you have to file for the child. There are a few other requirements as well which you can read about in the instructions to the form.  The first $1,050 will not be taxed, but the rate on the child’s income between $1,050 and $2,100 will be ten percent.  The amount of tax is transferred from the bottom of the Form 8814 and added to the parent’s tax on Line 44 of Form 1040.

Keep in mind, that in some cases, you are better off still filing the child’s tax return even though you have the option to report it on your return, due to other tax incentives and credits the child may be eligible to receive.

If the child has over $2,100 of unearned income, the parents can still elect to file the child’s return with their return.  If they decide to file a separate return for the child using Form 8615 – “Tax for Certain Children Who Have Unearned Income,” the form will take the parent’s taxable income and add to it the child’s taxable income.  Using this combined amount the appropriate tax bracket is used to determine the additional tax related the child’s portion of the income.  This amount is added to Form 1040 Line 44 of the child’s return as additional tax, and the Form 8615 is attached to the child’s tax return.

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. He can be reached at 831-333-1041.