Header Right

Income Tax Planning

Hit by the NJ Exit Tax for Selling Real Estate? Recover Your Money Quickly

by

If you’re a non-resident selling investment real estate in New Jersey, there’s a unique NJ tax you should be aware of. Both residents and non-residents always had to pay income tax on the gain upon the sale of real estate. This tax is required to be withheld for non-residents.  The “Exit Tax”, which came into law six years ago, requires the seller to file a GIT/REP form (Gross Income Tax form) in order to record a Deed for the transfer of his property. When a non-resident sells the property, New Jersey will withhold this income tax in the amount of either 8.97 percent of the profit or 2 percent of the total selling price, whichever is higher. Therefore, even if the property is sold at a loss, tax must be withheld to fulfill the two percent requirement.

You Can Recover Your Money

It’s important to realize that while the Exit Tax requires a substantial withholding, it doesn’t have any impact on the tax liability. When the seller eventually files his NJ tax return he is refunded the difference between what was withheld and what was owed. This recovery can be very significant when one factors in the selling costs and original purchase price, both of which reduce the taxable gain.

Estates Often Recover Most if Not All of the Tax Withheld

The recovery is often even greater in the case of real estate sold by an estate, as there is a step up in cost basis which would typically minimize a gain on the sale, often resulting in full recovery of the entire withholding. If a taxpayer has excess withholding it would be prudent to file Form NJ1040 (individual) or NJ1041 (estate) quickly to expedite the recovery of the excess withholding. 

 So who’s considered a “resident” and who’s a “non-resident” with regard to this tax? The law defines a resident taxpayer as one of the following:

  • An individual who is and intends to continue to maintain a permanent place of abode (home, residence) in New Jersey on/after the day of transfer
  • An estate established under the laws of New Jersey
  • A trust established under the laws of New Jersey

A nonresident is simply defined as “any taxpayer that does not meet the definition of resident taxpayer.”

 

Tax Planning Tips for the new 3.8% Net Investment Income Surtax

by

With a new 3.8% tax on “unearned” income kicking in in 2013, it’s very difficult to limit your tax to just “ordinary” income tax. If your income is earned, you pay 15.3% Self-Employment (Social Security) tax. If your income is un-earned, you now have the new 3.8% Net Investment Income (NII) tax to pay.

Profits from an S corporation are just about the only income that escapes Self-Employment tax as well as the 3.8% NII tax. The S corporation is now an even more attractive form of entity to minimize taxes for owners of certain businesses, depending upon the facts and circumstances. After paying reasonable compensation to the owners, the remainder of the profits flow through to owner’s personal tax returns subject only to income tax, not Self-Employment or NII tax.

 There are several areas you can address to possibly reduce your overall tax. Is your “Reasonable Compensation” unreasonably high? If it is, you may be paying Social Security tax on that compensation unnecessarily. Even if you are over the Social Security wage limit ($113,700 in 2013) you still continue to pay the Medicare tax of 2.9% coupled with the new 0.9% Medicare surcharge for high-wage earnings totaling 3.8%. Find out what is the standard of executive compensation for companies of your size, industry niche and profitability. [Read more…] about Tax Planning Tips for the new 3.8% Net Investment Income Surtax

Court Affirms Mortgage Interest Deduction Limitation for Unmarried Couples

by

Under the Internal Revenue Code, mortgage interest is deductible from income, provided that the outstanding mortgage balance is less than $1 million. Similarly, interest payable on a home equity line of credit that is used to finance home improvements is deductible as well, but only up to a loan balance of $100,000. An unmarried couple may at first glance assume that if they each buy half of a $2 million house, they can each fully deduct his or her half of the mortgage interest on his or her individual tax return. This would be true if the $1 million limitation is per taxpayer. A recent U.S. Tax Court case ruled otherwise. [Read more…] about Court Affirms Mortgage Interest Deduction Limitation for Unmarried Couples

New Year’s Gift from the IRS: 2013 Tax Increases

by

While a new year is always cause for celebration, an impending, significant jump in tax rates could dampen this year’s excitement for many. Here’s a brief overview of what lies ahead in 2013:

Higher Tax Rates – The maximum income tax rates next year could be as high as 43.4% on ordinary income and 23.8% on long-term capital gains including the new Medicare Surtax (see following paragraphs). Furthermore, the current 2% payroll (social security) tax reduction is set to expire at the end of 2012 (it was reduced from 7.65% to 5.65%).

Medicare Surtax on Investment Income – 2013 will bring a brand new surtax of 3.8% on net investment income that will apply to certain individuals, trusts and estates. The surtax will apply to taxpayers with modified adjusted gross income of over $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for taxpayers filing single or as head of household.

Medicare Surtax on Wages and Self-Employment Income – In addition to the surtax on investment income, a 0.9% Medicare surtax will apply to wages and self-employment income in excess of $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for taxpayers filing single or as head of household.

 This combination of tax increases may make 2012 the rare year to accelerate rather than defer income. For example, taxpayers in higher tax brackets may want to take salary (or bonuses) in 2012 to avoid the bracket increase in 2013. It may also be advisable to harvest capital gains to avoid the new Medicare surtax on investment income. Of course, anyone who currently qualifies for the 0% capital gains rate, which is scheduled to expire at the end of 2012, should certainly take advantage of this special rate. With all the looming changes as well as uncertainty about what 2013 will bring it would be very advisable to consult with your tax professional before popping the champagne.     

Urbach & Avraham Welcomes Partner Aryeh Levy

by

Urbach & Avraham, CPAs would like to welcome new partner Aryeh Levy. Aryeh brings with him over 35 years of public accounting experience, as well as a sterling reputation. His specialties include audits, reviews, compilations and other attest engagements including personal financial statements. Those benefiting from his expertise have included, among others, service, distribution, and manufacturing companies, medical practices, health care firms, real estate ventures (including HUD projects), and retirement planners. Aryeh also has extensive experience in tax planning, and return preparation. He handles multi-state corporate tax issues as well as complex individual income taxes including taxation of individuals and businesses operating overseas. He regularly consults on various accounting and tax issues with accounting firms around the world.

Although Aryeh just recently joined the U&A team he is no stranger to us. Jeff and Pamela have known him, both personally and professionally, for over 30 years. We are most fortunate to have him on board.Article Sponsored Find something for everyone in our collection of colourful https://www.swisswatch.is bright and stylish socks. Buy individually or in bundles to add color to your sock drawer!

Damaged by Hurricane Sandy? Get the Refund You Deserve

by

Taxpayers who are victims of Hurricane Sandy have the opportunity of claiming unreimbursed disaster-related casualty losses on their federal tax returns by filing Form 4684 Casualties and Thefts. The loss may be deducted on either the upcoming 2012 return or on an original or amended 2011 return. Claiming the loss on a 2011 return should result in an earlier refund. However in some cases waiting to claim the loss on the 2012 return may result in a greater tax saving, depending on your personal income tax situation.

The deductible loss is calculated by starting with the lesser of:

  1. Adjusted cost basis (original purchase price plus improvements), or
  2. Difference between the fair market value before and after the hurricane,                                             (alternatively the cost of repairing and restoring the home to its original value)

Ten percent of the taxpayer’s Adjusted Gross Income (AGI) is then deducted from the loss to arrive at the deductible amount. To illustrate, let’s assume John’s house was damaged in the storm with the following details:

Cost of house (in 1950)                                                      $10,000

Improvements                                                                   $150,000

Fair Market Value before the Hurricane                                $500,000

Fair Market Value after the Hurricane                                  $200,000

John’s Adjusted Gross Income                                            $100,000

John may only deduct the lesser of his adjusted basis of $160,000 ($10,000 purchase price plus $150,000 of improvements) or the change in fair market value of $300,000 (original fair market value of $500,000 minus $200,000 fair market value after the storm), which leaves him with only a $160,000 loss before deducting another $10,000 (10% of his AGI of $100,000) to arrive at a deductible loss of $150,000.

To view Form 4684, click here:  IRS Casualty Loss Form.  If you would like assistance with amending your 2011 tax return and /or assessing your casualty deduction please contact one of Urbach & Avraham’s tax consultants at 732-777-1158.