Category Archives: Medicare Tax

Your Last Opportunity to Reduce Your 3.8% Medicare Surtax For the Rest of Your Life

IRS has extended to 2014 individual income tax returns a one-time opportunity to potentially permanently reduce exposure to the 3.8% Medicare Surtax enacted with Obamacare. With apologies for melodramatic tone, if you didn’t make the election on your 2013 federal income tax return and you don’t make the election on your original 2014 return, you may pay more 3.8% Medicare Surtax than necessary for the rest of your life. IRS extended the opportunity to 2014 returns because the final 3.8% Medicare Surtax rules were published near the beginning of the 2013 tax return filing season. There is no impetus to further extend the opportunity into future years, and the election generally cannot be made on an amended return.

The planning opportunity relates to income from “passive” business activities. “Passive” business income is subject to the 3.8% Medicare Surtax. Non-passive income is exempt. Income from an activity is not passive if the taxpayer meets certain hourly participation thresholds. An election to “group” activities makes it easier to satisfy the hourly participation thresholds to avoid passive activity status. Even if separate activities do not individually satisfy the participation thresholds, the grouped activities may nevertheless qualify and therefore exempt all the activities from the 3.8% Medicare Surtax.

The one-time opportunity is to change an individual’s “grouping” elections so the individual may convert a collection of passive businesses subject to the 3.8% Medicare Surtax into a single non-passive business exempt from the 3.8% Medicare Surtax. If the election is not made on an individual’s 2014 federal income tax return and the individual is subject to the 3.8% Medicare surtax in 2014, the existing grouping elections—or lack thereof—usually apply forever, and the opportunity to freely reclassify passive activities is permanently lost.

For more information concerning 3.8% Medicare Surtax planning, as well as planning to avoid related taxes:Taking a Second Bite of the 3 8 percent Medicare Surtax

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Do Not File Your 2013 Income Tax Return Without Asking Your Tax Advisor About a “Regrouping Election” to Avoid the Obamacare 3.8% Medicare Surtax, If You Own Closely-Held Businesses or Investments

We have previously written about a one-time income tax election opportunity that could permanently reduce your exposure to the Obamacare 3.8% Surtax.  As tax filing season comes a to a close, this is a final reminder that you must make the election on your first income tax return that implicates the Surtax. For many taxpayers, that will be their 2013 income tax returns.

Elections generally cannot be made on amended returns. The failure to make the election is automatically treated as a decision to permanently, for all future years unless your circumstances change, opt into a default classification for your businesses and investments. The default classification is unlikely to be optimal for you. It is worth the effort to get it right the first time.

Here is a link to our prior discussion regarding the election: 2013 Federal Income Tax Return “Regrouping” Election Can Permanently Reduce Exposure to the New 3.8 percent Medicare Surtax

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Tax Court Reduces Obamacare 3.8% Medicare Surtax Bill for Irrevocable Trusts with Rental Real Estate Investments

If your family has an irrevocable trust holding closely-held rental real estate investments, a recent Tax Court case may help the trust reduce its Obamacare 3.8% Medicare Surtax bill. It may also help trusts use rental real estate losses to offset other income by avoiding the “Passive Activity Loss” limitations.

The Internal Revenue Service had argued that trusts could not use the same 3.8% Medicare Surtax and Passive Activity Loss planning techniques as individuals respect to rental properties, because trusts could not perform “personal services” in a real estate business to become a “real estate professional” as is necessary for the planning. The Tax Court disagreed, holding a trustee’s time devoted to such activities could satisfy the relevant tests. Here is a link to the opinion:http://www.ustaxcourt.gov/InOpHistoric/FrankAragonaTrustDiv.Morrison.TC.WPD.pdf

We have previously written about 3.8% Medicare Surtax avoidance techniques for individuals who own closely-held businesses. Here is a link: 2013 Federal Income Tax Return “Regrouping” Election Can Permanently Reduce Exposure to the New 3.8 percent Medicare Surtax. These techniques, which require active planning, are now available for irrevocable trusts as well.

Here is a link to a more detailed explanation of 3.8% Medicare Surtax planning for real estate investors: Medicare Surtax Planning for Real Estate Investors and Developers

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

2013 Federal Income Tax Return “Regrouping” Election Can Permanently Reduce Exposure to the New 3.8 percent Medicare Surtax

2013 is the first year of the 3.8 percent Medicare Surtax, which was enacted as a part of the law popularly known as “Obamacare.” Taxpayers have a one-time opportunity
to make an election on their 2013 federal income tax returns to permanently reduce exposure to the new surtax. Before filing an income tax return this year, it is important to understand and potentially avoid the surtax.

The surtax applies to interest, dividends, capital gains, rental and royalty income, certain annuities, and income from certain passive business and investment activities.
It potentially applies to persons with modified adjusted gross income over $200,000 for individual filers and $250,000 for married joint filers.

The planning opportunity relates to income from “passive” business activities. The IRS determines whether an activity is passive derivatively by reference to the
pre-existing Internal Revenue Code Section 469 passive loss rules. The activity is not passive if the taxpayer meets hourly participation thresholds. Grouping activities under the new rules makes it easier for taxpayers to meet the material participation
hourly thresholds to avoid classification as a passive activity. If separate activities do not individually satisfy the participation thresholds, the aggregated activities may qualify. However, once a taxpayer elects to group activities under Section 469,
he or she usually must retain the grouping for all future years.

Special rules apply to real estate professionals and persons engaging in leasing and farming activities. These individuals may have planning opportunities not available
to others.

The clock is ticking on taxpayers’ limited window to make the regrouping election. The election must be made on a taxpayer’s income tax return for the first tax year
beginning after December 31, 2012. Taxpayers that have exposure to the new surtax in 2013 should plan now to ensure that the election is properly and timely made on 2013 returns.

For more information concerning 3.8 percent Medicare Surtax planning, as well as planning to avoid related taxes:

Medicare Surtax Planning for Real Estate Investors and Developers

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Self-Rental Income Exempted From The New Medicare Tax

The IRS has backtracked on its guidance from 2012, by exempting certain self-rental income from the new 3.8% Medicare surtax. The new guidance applies common sense by aligning the tax treatment of self-rental arrangements with the passive loss rules under Section 469. Taxpayers should be able to avoid the surtax with a little pre-planning.
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