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Kiplinger Tax Letter Excerpts

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Medicare Surtax

Be aware of the new 3.8% Medicare surtax.  It applies to net investment income of single filers with modified adjusted gross incomes above $200,000 and couples over $250,000.  Marrieds filing separately have a $125,000 threshold.  Modified AGI is AGI plus tax free foreign income.  The tax is due on the smaller of net investment income or the excess of modified AGI over the thresholds.  Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income.  But tax-exempt interest and distributions from 401(k)s, IRAs, Roths and pension plans are not covered.        

Take steps to minimize the impact of the surtax if you’ll be subject to it or try to keep your income below the thresholds.  For example, use an installment sale to spread out a large gain or, if feasible, do a like-kind exchange to defer the gain.

Loss Carryforwards        

Investors with capital loss carryforwards can cull their portfolios for gains.  Any net gains they have this year, up to the carryover amount, aren't taxed at all.

Taking Losses to Offset Gains

Think about selling some poor performers.  Capital losses offset your gains, plus up to $3,000 of other income.  Any excess losses are carried over to next year.  Taking losses to offset gains can also reduce the tax bite of the 3.8% Medicare surtax.

But watch the wash-sale rule:  If you buy the same security within 30 days before or after the sale, the loss isn’t deductible.  Instead, the disallowed loss is added to the basis of the new shares.  For example, the rule can apply if you sell a mutual fund at a loss within 30 days of the date a dividend is reinvested, or if you have your IRA purchase shares that you recently sold at a loss out of your taxable account. 

Business Taxes

Bigger-ticket assets that aren't supplies also can be written off in many cases.  The limit depends on the policy that a firm uses for its financial books and records and whether it has a certified financial statement.  Those with certified statements can elect to deduct items costing the lesser of $5,000 or the amount used for purposes of their financial statements.  Firms without audited statements are capped at $500.  See www.kiplinger.com/letterlinks/materials for the complete details on the rules. 

Filing Season – Medicare Surtaxes

Filling out the 1040 will get a tad more complicated for upper-incomers, thanks to two Medicare surtaxes that took effect for 2013:  A 3.8% levy on net investment income and a 0.9% levy on wages and self-employment income.  Folks subject to these surtaxes will figure what they owe on Forms 8959 and 8960 and then transfer that amount to a separate line on the back of the 1040 form. 


Source:  The Kiplinger Tax Letter 9/27/13 – Vol. 88, No. 20

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