There have been new developments in the aftermath of the Supreme Court decision that struck down Section 3 of the Defense of Marriage Act (U.S. v. Windsor, et. al., 111 AFTR 2d 2013-2385, June 26, 2013), which required same-sex spouses to be treated as unmarried for purposes of federal law.
Now the IRS has issued a ruling (Rev. Rul. 2013-17) concluding that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether or not the couple lives in a jurisdiction where same-sex marriage is recognized.
The ruling clarifies that same-sex couples will be treated as married for all federal tax purposes, including income, gift and estate taxes and more. The ruling applies to all federal tax provisions in which marriage is a factor. More than 200 Internal Revenue Code sections and regulations relate to laws that refer to marriage, spouse, husband or wife. Some of the provisions affected include:
➤ Filing status
➤ Claims of personal and dependency exemptions
➤ Standard deductions
➤ Employee benefits
➤ IRA contributions
➤ Earned income tax credit claims
➤ Child tax credit claims
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships, even if recognized under state law.
The ruling concludes that legally married same-sex couples:
➤ Generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status. Single filing status is not appropriate.
➤ May file amended returns for prior years, if the tax year is still open under the statute of limitations.
Note that, in some cases, filing a joint return may result in a higher tax bill than the combined tax on two unmarried returns. The ruling concludes that same-sex couples who were married in prior years may, but are not required to, file amended returns.
It is advisable to make the tax calculation both ways before deciding to amend a prior return.
Generally, the statute of limitations expires three years after the later of the original due date of the return or two years after the date the tax was paid. For most people, 2010, 2011 and 2012 are still open under the statute of limitations.
Some taxpayers may have special circumstances – such as signing an agreement with the IRS to keep the statute of limitations open – that permit them to file refund claims for tax years 2009 and earlier.
According to the ruling, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pretax and excludable from income.
The ruling applies to filings (original or amended) on or after Sept. 16. This provides a limited opportunity for same-sex married couples, who extended their 2012 tax returns and have not yet filed, to file as unmarried taxpayers until Sept. 16.
©2013 CPAmerica International
When I advised my clients to complete their transactions in 2012, it was apparent that the effects of the actions our elected officials were going to take to avoid the “fiscal cliff” could only have a negative effect on taxes. At the twelfth hour, Mitch McConnell, Republican Senate Minority Leader bypassed Nevada’s own Harry Reid and reached out to Vice President Joe Biden with whom he had worked with when Biden was in the Senate. They worked out a compromise that was passed in the Senate and the House on January 1.
How does this affect you?
The tax rate for taxpayers with income over $450,000 married and $400,000 single increased from 35% to 39.6%. The tax rate on capital gains and dividends increase from 15% to 20% also applies to this threshold. When combined with the 3.8% healthcare tax, that tax rate on capital gains and dividends becomes 23.8%.
Some of you may be breathing a sigh of relief that the tax rate increase will apply only to those taxpayers. However, the 3.8% healthcare tax on investment income will hit those of you with taxable over $250,000 married and $200,000 single (see my blog in November 2012 regarding the healthcare tax of 3.8%). Also, itemized deductions are phased out at $300,000 for joint filers and $250,000 for singles, effectively raising their taxes.
Interestingly, the bill does not say whether the $400K/$450,000 threshold refers to adjusted gross income (AGI) or taxable income. AGI doesn’t include subtractions for itemized deductions, while taxable income does. With so many phase-outs of itemized deductions for taxpayers in the higher brackets, this may not be of much consequence to most of these affected taxpayers.
The payroll tax holiday reducing payroll taxes and self-employment taxes by 2% is over. The tax rate increases from 4.2% to 6.2%. That means for an individual earning the maximum 2013 cap of $113,700 or more, the increase would be $2,274, or nearly $200 per month.
The alternative minimum tax (AMT) still effectively eliminates many tax breaks for the higher income tax brackets. AMT was created in 1969 to ensure that wealthy taxpayers pay at least some minimum amount of federal income tax, regardless of deductions, credits or exemptions. In essence, it is a flat tax with two brackets, 26 percent and 28 percent. Under the new deal, Congress has finally created a permanent inflation “patch” that would allow millions to escape AMT. Without the patch, the AMT would have hit 31 million taxpayers this year, reaching deeply into the middle class.
What the bill did not include:
The bill only addressed the revenue side of the budget question and deferred action on the spending side for two months. Additionally, the agreement does not address any increase in the nation’s debt ceiling.
A strong economy depends upon predictable behavior and decision-making by the government. The competitive environment is unpredictable enough without our government making it more unpredictable. This has been lost on our elected officials much to the consternation of almost everyone: businessmen, employees, bankers, homeowners, and investors. Get ready for the budget and spending standoff two months from now.
Referencing a recent article in Bloomberg.com, President Barack Obama and House Speaker John Boehner have a big job ahead of them in the coming weeks. They hope to come together in act of solidarity to work out an agreement to avert the so-called fiscal cliff which happens at the end of this year if no deal is struck.
Obama, claiming a mandate from voters after his Nov. 6 re- election, has called for an immediate tax-cut extension for people earning less than $250,000 and insisted that top earners pay more. Boehner has cited public support for the re- elected House Republican majority and said tax rates must not go up. While both said they were willing to compromise and act quickly, Obama and Boehner have offered no public concessions. Their differences may take weeks to reconcile.
Obama and Boehner will meet at the White House in the next few days, along with House Democratic Leader Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell.
If Congress does not act by the end of the year, $607 billion in automatic spending cuts and tax increases are scheduled to take effect starting in January. They stem from previous decisions by Congress, including from the deal last year to raise the federal debt ceiling and the 2010 extension of tax cuts.
In recent remarks, Obama and Boehner have left open the possibility of agreement on preserving current tax rates while limiting tax breaks for top earners to raise revenue. Such an approach, should it come to fruition, would let Obama claim the higher tax payments he seeks from the wealthy and allow Boehner to avoid the higher rates he calls unacceptable.
Since his re-election, Obama has repeated the outline he laid out during his re- election campaign for a “balanced” approach to cutting the deficit that would include higher taxes on the wealthiest and some spending cuts. Boehner has also outlined the Republican approach to the fiscal cliff: avoid tax rate increases and spending cuts while beginning a process to overhaul entitlement spending and the tax code.
The president wants to let George W. Bush-era tax cuts lapse on income of individuals above $200,000 and of married couples above $250,000. That would push the top tax rate to 39.6 percent from 35 percent. Boehner has emphasized opposition to higher tax rates, rather than talking about higher taxes or higher revenue. He has endorsed the idea of increasing government revenue through an overhaul of the tax code without saying explicitly whether he would support a tax increase or the elimination of tax breaks without a corresponding rate cut.
Obama’s plan to cap tax breaks, which has gotten no traction in Congress, would raise about $584 billion over a decade, compared with the more than $900 billion that would be generated from higher rates on income, capital gains, dividends and estates.
Some Democrats may however insist on higher tax rates. Representative Sander Levin, the top Democrat on the House Ways and Means Committee, has said talk of limits on tax breaks was little more than “glittering generalities” that doesn’t reflect that the biggest breaks, including the mortgage interest deduction, are tax policies and not loopholes. Republicans have said that any additional tax revenue should come through a restructured tax code and from so-called dynamic scoring that relies on revenue from macroeconomic changes generated by the tax overhaul itself.
When pressed by reporters recently, Boehner reiterated his previous statements and said he wanted to preserve flexibility for negotiations with Obama on a deal to avert the fiscal cliff and reduce the federal budget deficit.
The blueprint for a deal to avoid a fiscal nightmare early next year may be found in the failed debt negotiations between Obama and Boehner in mid-2011. The contours of that plan included revenue increases, spending cuts and changes to lower the long-term costs of entitlement programs. Before the talks collapsed, Boehner was willing to accept $800 billion in revenue increases and Obama was ready to settle for $1.2 trillion.
Part of their negotiations on a $4 trillion deficit-cutting plan included a gradual increase in the Medicare eligibility age to 67 and an alternative yardstick for calculating inflation that would reduce annual Social Security cost-of-living adjustments and raise taxes by slowing the annual adjustments in tax bracket thresholds.
Regardless of where the negotiations begin and end, the citizens of this great country need to stand up and have their voices heard. We cannot rely on the leaders of each party to interpret the results of the recent election to benefit their position. I encourage each of us to take the time to contact our respective Senators Harry Reid and Dean Heller and Representatives Shelley Berkley, Mark Amodei and Joe Heck to let them know the importance of resolving this crisis. I know they appreciate hearing from their constituents and letters, phone calls and e-mails (the preferred method I believe) are the best way to let them know that we care and want some action.
Have you ever wondered just how much you pay in taxes over a year? Not just big tax items like income and property taxes, but even the taxes on the gas you pump into your car to the taxes on your utility bill?
Maybe you haven’t because you’re not obsessed with taxes like us CPAs, but if you are curious, the American Institute of CPAs has come out with a nifty tax calculator that is designed to give U.S. taxpayers a complete picture of their estimated total federal, state, and local tax obligation.
To give you fair warning, you will not be able to just plug in a few numbers and get your calculation. For the calculation to be accurate, you will need your prior year’s tax return, your estimated income, and a good idea of what you spend a month on expenses like gasoline, cable, cell phone, electric and gas, alcohol, clothing, etc. With just a click of the button you will be provided with a total estimated annual tax liability and exactly what percentage of your income is paid over to the taxing authorities. If you have a moment – check it out; the results just might shock you! http://www.totaltaxinsights.org/Calculator
The calculator is also available on our website – bvcocpas.com, in the resources/links section.
There has been much debate recently over Mitt Romney and his paying only 14% of his gross income in taxes in 2010 and still only 17.5% after itemized deductions (see his tax return at http://www.washingtonpost.com/wp-srv/politics/documents/romney-2010-tax-return.html). This is the same percentage of taxes that a single person making only $60,000 would pay. Does this sound fair to you? Now how does a business man making over $21,000,000 pay less than this single person? He does this with one of the multitude of tax benefits that the rich enjoy, the carried interest rule.
The carried interest rule is a tax law that many hedge fund managers enjoy including Romney and hedge fund managers like John Paulson. These people organize a partnership, get many investors to give them money to be limited partners, and invest it how they see accordingly. They can invest in businesses, stocks, options or land and agree to give the managers a certain percentage of the profits. Since the underlying asset is capital in nature, they are taxed at the capital gains rate of 15%, even though this is usually their only source of income.
Now to John Paulson. This is a hedge fund manager who in two years during the economic crisis made the biggest profits ever by an individual, $9,000,000,000. This profit wasn’t made by doing some benefit to society, but exactly the opposite. It was made by simply making bets that the housing market would tank (which it inevitably did) and the next year by betting that gold would go up. It seems to me that there is a huge problem in the tax code when somebody who does no benefit to society gets taxed less than the average person with a college degree. In fact, some of the bail out money that was given to banks to keep them liquid was just given to them as a conduit to Paulson so he could collect on his bets. This taxation doesn’t seem fair to me, but at least Paulson’s Advantage Plus fund can’t beat karma like it can the system, it lost 51% in 2011 by investing in Bank of America and Citigroup, among others.