Calculation of Income Tax for Individuals

Calculating your income tax is not a simple matter once you get to taxable income.  The reason is because we have different tax rates for ordinary income and capital gain income which includes qualified dividends. Tax rates for ordinary income range from 10% to 37%. Capital gain and qualified dividends can have the following tax rates: 0%, 15%, 20%, 25%, and 28% depending on level of income.  You have to carve out all of the different types of income getting preferential rates from taxable ordinary income and do a series of calculations. I am so grateful my tax software does this calculation for me on the schedule D tax worksheet and the qualified dividends and capital gain tax worksheet. These worksheets are so complicated that the IRS did them wrong for all 2018 returns with certain types of gains processed prior to May 15 when they caught their mistake. Please bear with me. Let me give you an example of the calculation assuming the following: taxable income of $153,818. qualified dividends of $12,433,  long term capital gain of $17,289, and unrecaptured  section 1250 gain of $120. The first calculation of capital gain tax is 12,433 + 17,289 -120=29,602 x .15=$4,440. The second calculation of ordinary income tax is 153,818-29,602=124,216 x .22 -8,121=$19,207. The tax due is the  two amounts added together  4,440 + 19,207=$23,647.

Applying for Medicare

One of my clients did not sign up for medicare when she turned 65 and lost out on reimbursement for a costly medical procedure. Don't let this happen to you. If you are already receiving social security benefits at age 65, then you will automatically be enrolled in medicare parts A and B so no problem. However, if you are not taking social security at age 65 you have to go online and apply for medicare. You should apply three months before you turn 65  to ensure your start date is not delayed. Remember too that medicare only covers about 80% of your medical costs so you will need a supplemental plan offered by a private insurance too. I recommend supplemental plan F or G instead of medicare advantage plan C, and also that you sign up for a private insurance company prescription drug plan D.

Opportunity Zone Fund vs. Section 1031

If you own some real estate that has appreciated in value, what should you do if you don't want to pay the income tax on the gain when you sell. You could defer the tax if you did a section 1031 exchange by buying like kind property with the gross proceeds from the sale. Well now you have another tool to use, the opportunity zone fund investment, which I feel is a better way to go with one exception that I will discuss later. The opportunity zone is a low income area in each state where investment is encouraged by tax advantages. The tax advantages include: deferral of tax until 2027, a 10% reduction of tax if the investment is held 5 years, a 15% reduction of tax if the investment is held 7 years, and no tax on the appreciation of the opportunity zone fund investment if held 10 years. One very big difference between the section 1031 and opportunity zones is that with opportunity zones you only have to invest the capital gain portion not the gross proceeds. The only time I would favor a 1031 section exchange would be if your intent is to hold the replacement property until death where it would get a step up in basis to fair market value.