For wealthy individuals, tax planning can be a lot more complicated than simply determining tax rates and tax deductions. Here are 10 tax issues you may not know about – some a result of the new tax bill passed in December 2017.
1. The 0.9% Medicare surcharge
If you’re a high-earner single, you pay 1.45% Medicare tax on the first $200,000 of compensation plus an additional 0.9% on compensation over $200,000 (for a total of 2.35%). This is one of two taxes created in 2010’s Patient Protection and Affordable Care Act.
Although the Tax Reform and Jobs Act of 2017 repealed the ACA’s individual mandate starting in 2019, the Medicare surcharge remains in place.
2. Tax treatment on international securities
When Americans buy stocks or bonds from a company based overseas, any interest, dividends and capital gains are subject to U.S. tax. And the government of the firm’s home country may also take a slice.
However, the foreign tax credit can ease some of the burden, allowing you to use some or all of those foreign taxes to offset your liability to the IRS.
3. Uncle Sam wants your taxes, no matter where you reside
Even if you’re a U.S. citizen or resident living abroad, you’re still subject to rules for filing income, estate and gift tax returns and paying estimated taxes.
If contributions to your pension or savings plan are tax-deferred where you’re living, they still will be taxed by the U.S. government.
4. The dreaded AMT
The alternative minimum tax (AMT) was designed to limit wealthier taxpayers from using tax breaks to limit their liability.
Tax Reform and Jobs Act of 2017 does not change AMT rates (26 percent or 28 percent) levied at an almost flat rate on taxable income above an exemption. However, there are major changes for exemptions:
• For single filers, the exemption now starts at $70,300, compared with $54,300 in the 2017 tax year, and starts to phase out at $500,000, compared with $120,700 previously.
• For those married and filing jointly, the amounts are now $109,400, compared with $84,500 previously, and $1 million, compared with $160,900.
5. Lower tax rates — for now
The new tax law also has changes for rates paid by the highest earners. Although there are still seven tax brackets, the top rate has been lowered to 37 percent from 39.6 percent.
The tax brackets go back to their original rates in 2026.
6. Hold the SALT deduction
No longer can you deduct an unlimited amount of state and local taxes on your federal return. The new tax law limits your deductions of these taxes to $10,000.
These deductions include state income taxes, property taxes and sales taxes. For high-income individuals paying high state and local taxes, it may result in a greater federal burden.
7. Limits on mortgage interest
For those with existing mortgages incurred before Dec. 15, 2017, the new tax law retains the $1 million limitation on mortgage interest deductions.
However, for mortgages taken out after that date, the limit for interest on mortgage debt is now $750,000 (both are for couples filing jointly).
8. Auditing blues
If you make a lot of money, be aware that the tax authorities probably notice.
Only 1 in 143 Americans faced an audit in 2015, but if you make between $1 million and $5 million in adjusted gross income, the chance of being audited increases to 1 in 20. Those making $5 million to $10 million faced greater than a 1 in 10 chance. And those with the highest income have the greatest chance of being audited: The IRS audited 19 percent of individuals making more than $10 million in 2015.
9. Tax issues on investment funds
High net worth investors often have access to hedge funds, marketable security funds, private equity funds, venture capital funds, real estate funds, and publicly traded partnerships.
The complexity of tax issues for these types of investments can be overwhelming. Investors need to take into consideration the character of the income, state tax laws, Schedule K-1, foreign reporting requirements, provisions on redeeming capital and much more.
10. Taxes and estate planning
If you have recently attained wealth or are on the road to becoming a high net worth individual, you’ll want to start thinking about estate planning – for which tax implications can be key.
Each high net worth estate is different, though, since many factors influence its settlement. Working with your wealth advisor and your tax advisor can help address the myriad tax issues you’ll have in estate planning.
Minimizing taxes is just one part of a strong wealth strategy. Contact a wealth advisor to learn more about developing your plan.