New 3.8% Net Investment Tax

This is the new Obamacare tax that starts 1/1/2013 for all single filers making over $200,000 and joint filers making over $250,000. Given the following set of facts the new tax would be $3,800 on the 2013 income tax return:

Single filer with adjusted gross income of $300,000 and net investment income of $200,000 included in the $300,000:
Tax is the lesser of 300,000-200,000 x 3.8%=$3,800 or 200,000 x 3.8%= $7,600

Net investment income is defined as all dividends, interest, capital gains, net rental income, and passive activity income. Earned income and retirement income are not included.

Charitable Cash Donations $250 or More

When you write a check to a charity for this amount, the charity is required to issue you a written receipt that indicates, the name and address of the charity, amount contributed, the date of the donation, and whether any goods or services were provided to you in return for the contribution. A charity will usually provide you with a receipt immediately. This acknowledgement letter must be received by you prior to the due date or the extended due date of the return. You will lose this deduction upon audit if you don't have a timely acknowledgement letter even if you have a cancelled check. Look at your records now to make sure you have a written receipt for each applicable donation you have made in 2012.

Social Security Benefits for Those Born 1943-1954

Your normal retirement age for social security for this age group is 66 at which point you would get 100% of your monthly benefit. If you start taking social security at age 62 which is the earliest you could take it, your benefit would be 75%. At age 65 the benefit is 93.33%, and at age 67 it is 108%. At age 70 you stop earning any bonus percentage, and your benefit maxes out at 132%. You can go online at www.ssa.gov to apply to view your annual social security benefit statement.

Business Travel Expenses

Taxpayers and the IRS have disagreed on the deductibility of travel expenses many times. If the trip is primarily for business, then most of the expenses are deductible such as meals, lodging and transportation costs. How does one determine if the trip is primarily for business? You have to look at all the facts and circumstances and see if you can make a reasonable case. How much time was spent on personal activities versus business activities? Was your spouse with you? Does your spouse have a legitimate business reason to be on the trip? Is your spouse one of your employees or independent contractors? If the trip is primarily for personal reasons, then no costs are deductible except direct business expenses such as a business meal. This issue reminds me of an old tax saying, "When a pig becomes a hog it gets slaughtered."

Alternative Minimum Tax for 2012

Alternative minimum tax or AMT will hit a lot more taxpayers on their 2012 income tax return unless Congress increases the exemption amount like they have in prior years. The increase in exemption (about $30,000 for joint filers) has been done in the past only on a yearly basis so it gets revisited every year. The AMT is a fun parallel tax that disallows certain deductions like taxes, miscellaneous itemized deductions, and personal exemptions. You have to pay the higher of the regular income tax or the AMT on form 6251. Let's hope that Congress fixes this again for 2012 before the end of this year.

New Obamacare Taxes

There are twenty new or higher taxes in Obamacare. Here are some of the more significant ones: Unless noted the new taxes start in 2013 or are already in place.

1. Dividends and other investment income earned by higher income taxpayers will have a new 3.8% surtax. The tax on dividends will be 43.4% for taxpayers in the highest income tax bracket.
2. Medical device manufacturers will have to pay a 2.3% excise tax on gross sales which will increase the cost of health care.
3. Medical itemized deductions for individuals will have a new 10% threshold of adjusted gross income which is up from 7.5%. You don't get the benefit of a medical deduction unless it is more than the threshold. This could hurt if you have high medical bills and itemize deductions.
4. Medicare payroll taxes on wages and  self employment income will increase from 2.9% to 3.8% on wages and self employment income exceeding $200,000 for individuals and $250,000 for joint returns.
5. There is a 10% tax on indoor tanning services.
6. You won't be able to contribute more than $2,500 to a flexible spending account. This is a pretax contribution for medical expenses that used to be unlimited.
7. Employers will have to pay a 40% tax on too generous healthcare plans starting in 2018. These are defined as Cadillac health care plans costing $10,200 for an individual or $27,500 for families.
8. Those not buying health insurance are subject to taxes of between $695 per person to $4,700 per person depending on income. This penalty tax will phase in between 2014 and 2016 and be collected by the IRS. Those making less than $9,500 will be exempt from the penalty, along with Indian tribes, and members of certain religions. The penalty tax though is generally going to be less than the cost of health insurance so many people, particularly young people will still choose just to pay the penalty.

Failure to File Penalty

The failure to file penalty is the reason it is so important to file a return by the extended due date which is today for 2011 individual returns. The Federal penalty is 5% for each month or part of a month up to a maximum of 25% of any unpaid balance of tax due. Georgia has the same penalty also. It is better to file an incomplete return and then amend later when you have all of the information.