Sunday, November 17, 2013

Tax "Mis-Information"

Have you received an email with a situation describing how the Federal or State government has passed a law to _____________ (fill in the blank)?  The story sounds quite possible and believable but after digging around and going to a true reference source it turns out to be an "urban legend".  As a tax advisor, I am often sorting out the truth from the fiction.  I think it's critical to ask questions of trusted advisors when you hear of some purported tax scheme, as there many tax court cases where the IRS wins due to erroneous understanding of tax laws, publications or even just frivolous arguments (for examples look for info on Wesley Snipes tax troubles). 

Some recent stories include the 3.8% sales tax on the sale of your home.  The origins of this revolve around the Affordable Care Act/Obamacare law that enacts an additional 3.8% tax on Net Investment Income. Since the sale of a home is generally a capital gain (investment income), the sale of a home MAY be subject to this tax. But there are a couple of hurdles that have to be overcome before this sale is subject to the 3.8% tax - 1) if this is your primary residence and has been owned and used as a primary residence for 2 years out of the last 5 years, the first $250,000 in gain ($500,000 for married taxpayers) is not taxable for income tax or the additional 3.8% tax, 2) the amount that exceeds item 1 then get transferred to Schedule D/Form 8949 and netted with any other gains or losses, if that is a negative then still not subject to the 3.8% tax, 3) the "last hurdle" is to see if investment income is over $200,000 single or $250,000 for married taxpayers and the amount that exceeds that threshold is subject to this additional tax.

As you can see this story started with a kernel of truth but then grew from there.  This also demonstrates that the US tax laws can be overly complicated and difficult to understand or to explain. Because of these reasons, I highly suggest discussing your situation with an advisor that can clearly explain the tax impact of choices before you make that choice because there may be a better way to structure a transaction but you can't make changes once it is done.

Is there a tax question you want to discuss? Send me a comment and I may be able to address that request.

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