Tax Lawyers Minneapolis

Will Capital Gains Move Me Into a Higher Tax Bracket?

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A frequently asked tax question is whether capital gains may push a taxpayer into a higher tax bracket. This article will examine some of the tax possibilities with respect to this question.

Background

In general, capital gains are subject to the 0% or 15% capital gain rate. Generally, for 2010, if all of a taxpayer’s taxable income is within either the 10% or 15% tax brackets (and all of the net capital gains are eligible for the 10% or 15% rates), then a taxpayer’s capital gains will qualify for the 0% rate.

In order to calculate tax liability on Schedule D or on the IRS capital gains worksheet, taxable income is reduced by net capital gains and qualified dividends (other than 28% rate gain and unrecaptured Section 1250 gain), leaving ordinary income as a result. In general, capital gains (and qualified dividends) will be tax free to the extent they “fill in” the difference between ordinary income and the top-end of a taxpayer’s filing status. (See examples below).  For tax year 2010, the top-end of the 15% bracket is taxable income of $34,000 for single taxpayers and married filing separately, $45,550 for heads of household, and $68,000 for married filing jointly. Thus, taxpayers will qualify for the 0% rate if none of their taxable income exceeds the top-end of their applicable filing status.

Examples

Please, note that the examples below are for illustrative purpose only and may not apply to your specific fact situation.

1). Taxpayers qualify for the 0% rate

Married filing-jointly taxpayers have ordinary income of $50,000 and net capital gain of $15,000 as their only other source of income. Because the top-end of the 15% bracket for their filing status is taxable income up to $68,000 and their ordinary income added together with their capital gain does not exceed that top-end threshold, the entire $15,000 capital gain will qualify for the 0% rate.

2). Taxpayers qualify for 0% rate on part of their capital gains, and pay at the 15% rate on the rest

Married filing jointly taxpayers have ordinary income of $60,000 and net capital gain of $20,000 as their only other source of income. Because the top-end of the 15% bracket for their filing status is taxable income up to $68,000 and their ordinary income added with their capital gain exceeds the top-end of that threshold, part of their capital gain must be paid at the 15% rate. Specifically, subtracting their ordinary income of $60,000 from the top-end of their filing status bracket of $68,000 leaves $8,000 of capital gains that can qualify for tax free rate. The remainder of their capital gain will be taxed at 15%.

3). Taxpayers do not qualify for the 0% rate

Married filing jointly taxpayers have ordinary income of $75,000 and net capital gain of $5,000 as their only other source of income. Because their ordinary income exceeds the top-end of the 15% bracket for their filing status ($68,000), none of their capital gain will qualify for the special 0% rate. Instead the entire capital gain will be taxed at the 15% rate.

Note that these are the general rules relating to capital gains and tax brackets, but other rules and factors may apply under applicable circumstances. For example, if Section 1250 unrecaptured gain property or capital gains taxed at the 28% rates are involved, the general rules will not apply. Also, deductions and various phaseouts may still be limited even if the taxpayer qualifies for the 0% rate. Additionally, there may be state capital gains tax rates that apply even if the federal rate is 0%.

Therefore, do not try to rely on your own opinion to resolve your capital gains tax questions. Rather, you should review your specific situation with a tax attorney who will help you deal with these complex tax issues.

Contact Sherayzen Law Office to Get Capital Gains Tax Help

Do you have further questions regarding your capital gains and tax liabilities? Contact Sherayzen Law Office at (952) 500-8159 to discuss your tax situation with an experienced tax attorney.

Underpayment and Overpayment Interest Rates for the Third Quarter of 2011

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On May 16, 2011, the Internal Revenue Service announced that interest rates for the calendar quarter beginning July 1, 2011, will remain the same as in the previous quarter. The rates will be:

  • four (4) percent for overpayments (three (3) percent in the case of a corporation);
  • four (4) percent for underpayments;
  • six (6) percent for large corporate underpayments; and
  • one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. These rates determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Rev. Rul. 2011-12. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. Pursuant to I.R.C. section 6621(c), the rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. See section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date.

The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 567, and 571. Interest factors for daily compound interest for an annual rate of 0.5 percent are published in Appendix A of Revenue Ruling 2010-31, 2010-52 IRB 898, 899. 3.

Contact Sherayzen Law Office

If you have any questions with respect to IRS interest rates and any other tax-related concerns, you should contact our experienced tax firm to discuss your case.

Extension of Time to File Federal Tax Return for Individuals: Form 4868

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If an individual taxpayer cannot file his tax return by the due date of the return, the IRS allows most of such taxpayers to request an automatic six-month extension of time to file the return.

In order to do so, the taxpayer should file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by the return due date. Generally, for the 2010 tax return, taxpayers who wish to take advantage of the extension will need to file Form 4868 on or before April 18, 2011 (the main exception is where a taxpayer operates based on fiscal year).

The most difficult part of filing-out Form 4868 is the requirement to show the “full amount properly estimated as tax” for such taxpayer for the relevant tax year. A taxpayer is deemed to have complied with the requirement when he makes a bona fide and reasonable estimate of his tax liability based on the information available to him at the time he makes his request for an extension.

Failure to properly estimate one’s tax liability may lead to the invalidation of the extension. This means that the return will be considered a regular delinquent return. Such determination, in turn, is likely to result in the imposition of failure to file and failure to pay penalties from the statutory due date. I emphasize that the penalties may be imposed from the original statutory due date where Form 4868 is invalidated.

It is important to emphasize that an extension of time to file is not equivalent to an extension of time to pay. It is generally true that, under the relevant Treasury regulations and IRS Notice 93-22, individual taxpayers still can file a valid Form 4868 and obtain an automatic extension without paying the properly estimated tax in full – this means, of course, that no late filing penalty is likely to be assessed. However, the taxpayers will still owe interest on any past due tax amount and may be subject to a late payment penalty if payment is not made by the regular due date of the return.

It is also important to note that other extension provisions, in addition to the regular Form 4868 automatic six-month extension, may apply, especially for taxpayers who live outside of the United States or who are part of the U.S. military, either on duty outside the United States or hospitalized as a result of injury. More exceptions are made for taxpayers who live in declared disaster areas.

Contact Sherayzen Law Office to Get Tax Help

Sherayzen Law Office can help you resolve your tax problems. Contact us NOW to speak with an experienced tax attorney!

Mortgage Debt Forgiveness Tax Relief: Basic Facts

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Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence during tax years 2007 through 2012. The limit is $1 million for a married person filing a separate return. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

In order to qualify for the tax relief, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

However, proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion. Debt forgiven on second homes, rental property, business property, credit cards or car loans also does not qualify for the tax relief provision.

If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. You should examine the Form 1099-C carefully and notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

If you qualify for tax relief, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

Note that other tax relief provisions – such as insolvency – may be applicable.

Alternative Minimum Tax: Basic Facts for Tax Year 2010

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Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the Alternative Minimum Tax AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax. The AMT provides an alternative set of rules for calculating a taxpayer’s income tax. In general, these rules should determine the minimum amount of tax that someone with a certain amount of income should be required to pay. If a taxpayer’s regular tax falls below this minimum, he has to make up the difference by paying alternative minimum tax.

A taxpayer may have to pay the AMT if his taxable income for regular tax purposes (plus any adjustments and preference items that apply to him) are more than the AMT exemption amount.  The AMT exemption amounts are set by law for each filing status. For tax year 2010, Congress raised the AMT exemption amounts to the following levels:

$72,450 for a married couple filing a joint return and qualifying widows and  widowers;
$47,450 for singles and heads of household;
$36,225 for a married person filing separately.

The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’  tax rate has increased to $6,700 for 2010.