ANOTHER UNTRUE TAX EMAIL

A client recently forwarded an unsolicited spam email he received and asked me if the information it reported was true.  As it turned out only two of the statements contained some truth.

Here is the text of the email, with my comments on each statement in bold -

Subject: Tax, Tax, Tax, Tax.........

Remember this WHEN YOU DO YOUR TAXES IN APRIL ! ! ! ! ! !

In case you didn't notice. Here is what happened on January 1, 2014:

Top Medicare tax went from 1.45% to 2.35%, an increase of 62%.  This is true, but was effective January 1, 2013, for wages in excess of $200,000 for singles and $250,000 for married filers.

Top Income tax bracket went from 35% to 39.6%, an increase of 13%.  This is true, but was effective January 1, 2013.

Top Income payroll tax went from 37.4% to 52.2%, an increase of 52%. I have absolutely no idea what this means.  Payroll tax is made up of Social Security tax – which remains at 6.2%, Medicare tax – which, as mentioned above is 1.45% for most and 2.35% on wages in excess of $200,000 or $250,000, and Federal Unemployment Tax – which remains at .6%. 

Capital Gains tax went from 15% to 28% an increase of 87%.  Wrong again.  The top tax rate on “normal” long-term capital gains and capital gain distributions went from 15% to 23.8%, and was effective January 1, 2013.  There is a 25% tax rate on long-term capital gains resulting from “unrecaptured Section 1250 gain” (depreciation recapture) and a 28% tax rate on long-term capital gains from the sale of certain “collectibles”, but this is nothing new, and was in effect well before the Affordable Care Act was introduced.

Dividends tax went from 15% to 39.6%, an increase of 164%.  Nope.  This is untrue.  The top tax rate on “qualified” dividends went from 15% to 23.8% and the top rate on dividends that do not qualify went from 35% to 39.6%, and was effective January 1, 2013. 

Estate tax went from 0% to 55%, an increase of infinity.  This is totally untrue.  The top estate tax rate for 2013, 2014, and 2015 was and is 40%.

Remember this fact: These taxes were all passed with only Democrat votes.  No Republicans voted for these taxes.  See my comments to the next false statement.   

These taxes were all passed under the Affordable Care Act, aka OBAMACARE.  Not true.  The above increases were included in the Affordable Care Act AND the American Taxpayer Relief Act of 2012.  In the House 237 Republicans originally voted for the American Taxpayer Relief Act of 2012 and 170 Democrats voted against the legislation and in the Senate 40 Republicans voted for it and 3 Democrats voted against it.

None of the true tax increases that were referenced in the email should affect the 2014 tax liability of the client who forwarded the email to me – unless he won the lottery.

I am reminded of another email that circulated a year or so ago that also contained false information about the Affordable Care Act.  That email said that Obamacare created a national sales tax of 3.8% on the gross proceeds from the sale of one’s personal residence – which is totally untrue.  

What was true is that taxpayers will pay a 3.8% surtax on the lesser of (1) net investment income, or (2) Modified Adjusted Gross Income in excess of $250,000 on joint returns and $200,000 for single filers.  Net investment income is interest, dividends, net capital gains, annuities, royalties, rents, and pass-through income from passive S-corporations and partnerships less related investment expense deductions from Schedule A. 

The $250,000 and $500,000 Section 121 exclusion on the sale of a principal primary residence still applies.  So if the gain from the sale of your home is less than $250,000 or $500,000, as applicable, and you meet the Section 121 requirements, there is no federal income tax and no 3.8% “surtax” on the gain, and certainly no federal “sales tax” on the “sale price”.  If the net gain exceeds the $250,000 or $500,000 threshold the 3.8% surtax could apply to the excess only.

Hey, the Affordable Care Act, or Obamacare, is bad enough as written.  You don’t have to make up lies about it.   

The bottom line – totally ignore any unsolicited email you may receive that alleges to provide information on income taxes.  As I remind you every year at tax time - do not accept tax advice from anyone other than a professional tax preparer.  And do not believe anything about taxes that you are told or read that is not provided by an identifiable professional tax preparer.  

 TTFN

WTF?

While I was in Austin a client sent me an email asking about the new “real estate sales tax” that he and the Mrs would have to pay if they sold their home. The email included the following, which he had received in a forwarded email -

“REAL ESTATE SALES TAX –

Under the new health care bill - did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don't kick in until 2013 (presumably after Obama’s re-election). You can thank Nancy, Harry and Barack and your local Democrat Congressman for this one. If you sell your $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Is this Hope & Change great or what? Does this stuff makes your November and 2012 votes more important?

Oh, you weren't aware this was in the Obamacare bill? Guess what, you aren't alone. There are more than a few members of Congress that aren't aware of it either (result of clandestine midnight voting for huge bills they’ve never read). AND, there are a few other surprises lurking.”

A real estate sales tax? Poppycock!

Here is the real story –

Beginning in tax year 2013 there will be an additional 3.8% Medicare surtax on the lesser of –

(1) Net investment income, or

(2) Modified Adjusted Gross Income (MAGI) in excess of $250,000 on joint returns and $200,000 for single filers.

The surtax is on taxable income and not gross proceeds. If you sell your principal personal residence you can exclude up to $250,000 of the gain ($500,000 on a joint return) if you owned and lived in the residence for 24 months during the 5-year period prior to the sale. If 100% of the gain from the sale of a personal residence is excluded from tax under this rule then there is no taxable income on which to pay the 3.8%.

In the above example if the $400,000 home that is sold qualifies as the taxpayer’s principal residence for purposes of the exclusion the additional tax would be “0” if the taxpayer is married and filing a joint return – because of the $500,000 exclusion there is no taxable income. There would only be an additional tax if the taxpayer’s exclusion was limited to $250,000 and the basis of the home sold (original cost + capital improvements + closing costs on purchase and sale) was less than $150,000 and his/her modified AGI was more than $200,000 – but this would be no where near $15,200.

There would be a possible 3.8% surtax liability on any gain from the sale of any vacation, rental or investment real estate. But again the tax would only apply to the net taxable gain if MAGI exceeded $200,000 or $250,000 – and not the gross sale price.

The only truth in the above nonsense is the fact that the additional taxes do not kick in until 2013 – after the next Presidential election.

My client did the right thing. Upon receiving this totally false information from someone other than a competent tax professional he contacted me and was told the truth. As I am constantly writing and saying – NEVER ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER.

FYI – if you don’t believe me FactCheck.org addressed this issue back in April. Click here.

TTFN

SPEAKING OF MISCONCEPTIONS

As an addendum to this morning’s post:

The source of many misconceptions about federal and state income taxes is often unsolicited tax advice from uninformed friends, family and even “Strangers on A Train”.

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Talk about bad tax advice. You should check out the May 4th comment on my post “ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC" from Schadenfreude and my response.