7 sneaky taxes that could blindside you
Don't let changes to tax laws or your income ambush you. Be sure you're up to speed on these lurking surprises.
By Alden Wicker, LearnVest
You've already done your taxes, right? Even if you've got them figured out — or have an excellent accountant doing them for you — you still might be in for some expensive surprises this season.
Below, Joseph Boyce, a New York–based CPA, and Gail Rosen, CPA and owner of a New Jersey–based accounting firm, highlight the taxes they'll be warning clients about this season.
Granted, these picks don't apply to everyone, which is exactly why they're so sneaky. From brand-new measures like the NIIT to longstanding gotchas like the AMT, you'll want to be aware of these long before you file.
1. The Medicare tax
Let's start with the shiny new Medicare tax, which was instituted as part of the Affordable Care Act (a.k.a. Obamacare). It only affects people with incomes over a certain threshold, but if you are one of those people, you might be surprised to see a few hundred dollars tacked on your tax bill.
Who may be subject: If you make at least $200,000 individually, $250,000 filing jointly with your spouse or $125,000 filing separately from your spouse, you'll be assessed a .9% tax on any income beyond that.
What you should know: The thing is, according to Boyce, you can be taxed two ways: If you make over $200,000 individually, you may not notice, as your employer takes the tax out of your paycheck throughout the year.
Or, there's another option. "If Jim is married and made $190,000 in 2013, and his spouse, Kim, made $150,000, neither made enough to have the tax taken out of their paycheck all along," illustrates Boyce. "Instead, because they make $340,000 together, they will get hit with the whole tax at the end of the year. As a result, the couple will have to pay an additional tax on the $90,000 over $250,000, which would be $810." That, you'll notice.
2. The jock tax
This tax, levied by 22 individual states on high-earning traveling workers, is called the jock tax because its most high-profile targets are famous athletes like basketball and football players. Technically, it is the most common form of what's called "nexus," which taxes income earned out-of-state. So, for example, Seahawks and Broncos players who traveled to New Jersey to play the Super Bowl will owe the state taxes on a percentage of their income when they file their 2014 tax return, because New Jersey is where they earned it.
Who may be subject: Athletes are targeted by this tax because both their salaries and schedules are made public, but states have also tried to target traveling musicians, lawyers and bankers by looking up their travel records. Even if you aren't a famous athlete or musician, if you travel for work, you should be on the lookout for this tax.
What you should know: "The minute you spend one hour in a state on business, you could have, depending in the state rule, nexus there," explains Rosen. "Every state has a different law." And even if you don't report your out-of-state income, you might not skirt this tax — other people could be reporting for you. "If you work for someone, they could write on your W-2 that you are in different states, that you go to different offices. If you're self-employed, you might get a 1099 that is filed in that state office," he says. "Or at a trade show, state officials may come up to you and say, 'Are you registered to do business in this state?' If you don't report, your accountant is going to have to do a lot more work." If you cross state borders in your work, inform your accountant of all earnings in other states, or at the very least, where you've traveled for business and what you were doing there. And yes, if this tax applies to you, you'll want an accountant.
3. Local taxes
Depending on where you live, you may pay not only federal and state taxes but county and city taxes too.
Who may be subject: This tax could apply to anyone, but it will probably be most impactful on residents of larger cities. See specific examples below.
What you should know: New York City is the most famous for having sky-high taxes just for living in its borders. But high local taxes pop up across the Northeast and Midwest in densely populated areas such as Detroit; Wilmington, Del.; and Portland, Maine. "Every city is different in what they charge and how they do it," says Rosen, "but rates are around 3 percent to 4 percent."
4. The Alternative Minimum Tax (AMT)
The Alternative Minimum Tax was first conceived as a way to keep the wealthy from taking advantage of tax loopholes. But the AMT was never indexed to inflation and essentially became a tax on the middle class. Note that in 2013, however, Congress did pass a permanent "patch" to make sure the tax reflects inflation, which should decrease the number of people paying it going forward.
Who may be subject: You may be subject to the AMT if your household makes more than $100,000 and has very large deductions. To learn more about this tax and whether it might apply to you, consult our guide to the AMT.
What you should know: It's hard to tell for sure if you're going to be hit, because there are a lot of factors that go into calculating whether the AMT applies to you. Basically, you're asked to calculate your taxes twice: in the normal way, and the alternative way, via Form 6251. Whichever calculation comes out to be higher is the one you pay. The other downside of the AMT is that you may lose eligibility for deductions such as medical expenses or miscellaneous business expenses.
But according to Rosen, there may be an upside: "Lately, because tax rates have increased for people making higher incomes, fewer people pay the AMT. If you're already paying it, you might think tax rates are rising, but in truth they didn't go up by much for you because you already pay more through the AMT. You might not even notice the change!"
5. The mansion tax
Officially known as the Real Estate Transfer Tax, this imposes a tax of 1 percent of the sale price of any residential property over $1 million.
Who may be subject: This one is for buyers in New York State only.
What you should know: Except in special cases, this tax is the responsibility of the buyer, to be paid within 15 days after the closing. This tax doesn't appear on your return, but it's a tax you'll want to watch out for nonetheless. "Before you go to closing, you have to know all the checks you're going to write out," advises Boyce. "Don't be surprised that you have to pay 1 percent to the state. Even if it's a $1 million purchase, 1 percent of that is another $10,000."
6. Net Investment Income Tax (NIIT)
Here's a word to add to your vocabulary: rentier. It's someone who brings in a lot of passive income like interest, rental income, royalties or capital gains and dividends on investments. And starting in 2013, rentiers are subject to a brand-new tax.
Who may be subject: "Basically," Boyce says, "if you make passive income and your income is over a certain threshold, then you're hit with an additional 3.8 percent of NIIT." That threshold is $200,000 if you're filing singly, and $250,000 if you're married filing jointly.
What you should know: Just to be clear, if you make $197,000 from your salary, and $5,000 from passive income, you'll get taxed at the NIIT rate on that $5,000 only.
7. Canceled debt
If you default on your debt payments and your creditor decides to write them off without demanding compensation, that debt is considered canceled, or forgiven. Once you get over being giddy that your mortgage debt has been slashed, your credit card debt forgiven or your student loan debt canceled, you have a harsh truth to face: The IRS considers canceled debt as income, and expects you to pay taxes on it.
Who may be subject: This tax doesn't apply to everyone with debt, only people with more than $600 of canceled debt. For example, if you had $10,000 in credit card debt, defaulted on payments, and you've negotiated your debt down to $3,000, you'll owe income tax on $7,000.
What you should know: "A lot of people whose loans were forgiven are surprised that they have to pay taxes on that debt," says Rosen. "Though there are some exceptions for 2013." For instance, the Mortgage Forgiveness Debt Relief Act, created in 2007 to help people hit by the housing crisis, allows you to exclude debt forgiven on your principal residence. In addition, bankruptcy, insolvency (when your debts are worth more than the fair market value of all your assets), certain farm debts and non-recourse loans are excepted.
More from LearnVest
|Tags:||1040accountantcut taxesfederal taxIRSreal estatestate taxtax deductiontax formstax lawtax preparationtax ratetax returntaxesTips|
VIDEO ON MSN MONEY
Taxes on wages (in any form – flat or progressive) are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.
The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.
Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.
Here's my favorite. Tax increase to build yet another school because the one they built 5 years ago is now overcrowded.
You want to build your new home in what used to be a small town of 5,000 ? You pay for the school. My youngest graduated 16 years ago and the one she went to didn't have an indoor pool. I've been paying taxes for 45 years, so pay for your own kids.
Copyright © 2014 Microsoft. All rights reserved.