They’re ba-ack… Not the poltergeists, although many of you may consider them part of the genre…No, it’s the required annual tax filings…

First, the good news. Yes, there is good news. Most of your filing requirements will be identical to last year. Unless you are among the top 5% of the financial earners in America. Then, it’s not good news.

Before I get to that, there is one other change for income tax filings. If you are LEGALLY married- that means you are not divorced (separated still means you are married!)- gay or straight. You MUST file as married filing separately or married filing jointly. If you are NOT married, you cannot file a joint return.

(It used to be that Virginia recognized common-law marriages- but in their desire to screw around with gay marriages, these were disallowed. Moreover, if you are a same sex legally married couple and you live in Virginia- you are in for a world of hurt. Check out this page for what you MUST do to comply with federal and Virginia regulations. One can only hope now that Attorney General Cuccinelli is gone, the new Virginia executive team will scrap his bizarre ruling.)

Now, for the changes…

Dividends and capital gains. Dividends will be taxed at ordinary tax rates or the preferred long-term capital gains tax rate. If they are “qualified”, they ‘qualify’ for the preferential tax rate. (Part of the “qualified” rules is that you have to own the stock for more than 60 days during the period prior to the ex-dividend rate. Don’t worry about that- your broker’s firm will list the dividends as ordinary or qualified for you. It’s only an issue for closely-held firms- and then you can come to us 🙂  )

Woops. Not so fast. If you have taxable income of $400 K ($450 K for joint filers, $425 K for head of household [HOH]), you could be paying the maximum 20% tax on those dividends and capital gains. (That’s a new tax bracket.) The bottom two brackets (less than $36250 for singles, $ 72500 joint, and $ 48600 HOH) pay 0% on dividends.

And, there’s more. Your capital gains- and all other investment income- could be subject to a 3.8% Medicare tax. This applies to those whose adjusted gross income exceeds $200 K ($250 K for married couples)- but only on the lesser of your net investment income or the portion of your income that exceeds the threshold. (That’s the true definition- what the rule is saying is if you make that amount of money, then the surtax applies NOT on the money you earned that exceeded the threshold, but only the investment income [if all of it was over the threshold] or the amount you exceeded the threshold [if that is lower than your investment income.]  You will need to file a new form-  8960- which is why everyone’s tax filing is delayed until the end of January- because that form is NOT yet finalized. Here’s the draft version.

Salary and Self-Employment Income: Medicare surtax. As you might have guessed, that 3.8% Medicare tax is going to be in play here also. Because up until this year, the Medicare tax was 2.9% (1.45% for the employee, 1.45% for the employer). Now, you could owe an extra 0.9%, if your salary and/or self-employment income exceeds $ 200K ($250K married)- and that tax payment is yours alone, not the employer’s responsibility to share. Oh, and that required form (8959) is also not finalized.

Exemption Limitations. If your income exceeds $250 K ($300 K joint, $ 275 K HOH), then you exemptions may be curtailed- or even completely phased out. It’s a sliding reduction in the exemption that begins at these income levels and there’s nothing left of the exemptions when your income hits $372.5 K ($422.5 K joint or $397.5 K HOH)

Schedule A limitations. First, for everyone. Medical expenses now must exceed 10% of your adjusted gross income to be deductible. For those with higher incomes ($ 250K single, $275K HOH, or $300K joint), there is a limitation on the total amount you can deduct on this Schedule. (These deductions lower your adjusted gross income that derives your taxable income.)

The deductions are reduced by up to 3% of your adjusted gross income- but you will always be able to have at least 20% of the total listed on Schedule A to use. (Not that would be much comfort…)

Oh- your taxes may be mailed or eFiled starting on 29 January- and are still due by 15 April.  If you need to file a FAFSA (please use this link- there are lots of fake one’s out there that charge you- or “borrow” your financial information) or other scholarship forms, it would be best to get to your tax consultant (Me, me, me!) right away so it can be submitted on 29 January.  Because it’s the early bird that gets the worm!

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