December 16, 2010

Medicare B Premium Surcharges, Part 2: 2011 Premiums

As part of the 2003 Medicare Prescription Drug Bill, a provision was added for a surcharge to be paid in addition to the normal Part B premium.  This effectively “means tests” the amount of Medicare premiums you are paying.  Those with higher Modified Adjusted Gross Income (MAGI)  have to pay more for their coverage than those with Lower Modified Adjusted Gross Income.  This “surcharge” needs to be taken into account when doing your tax planning.  It is particularly important today, considering the flurry of Roth Conversions taking place, as well as other income acceleration strategies.  This “surcharge” is based on Modified Adjusted Gross Income, not your taxable income, so marginal tax rates are not a factor here; it, in essence, is a tax on your income (including tax-exempt income, EE bond interest used for educational purposes, and any foreign earned income) before deductions and exemptions.  Don’t forget that the cash flow impact for married taxpayers is times two.  The increase in premiums is not permanent; if your increase was the result of a one-time event and your MAGI subsequently falls below a threshold, your premiums will be reduced to those levels.  So for many taxpayers the increase in premiums may be for only one year. 

You will not see the increase in your premiums immediately once you cross one of the MAGI thresholds.  To determine your MAGI, the Social Security Administration uses your most current tax return information provided by the IRS—typically, your tax return filed for two years prior (example: 2011 based on 2009 income tax return information).

In certain circumstances you can appeal the increase; however, one-time capital gain income and IRA liquidations (including Required Minimum Distributions) and Roth Conversions are not on the list of reasons to appeal.

If you have filed an amended tax return that has changed your MAGI, you will need to provide it to the Social Security Administration. 

If you disagree with the Social Security Administration, you can appeal in writing by completing a request for Reconsideration (Form SSA-561-U2; http://www.socialsecurity.gov/online/ssa-561.html).

It is important to consider the real “tax” cost of financial transactions taking into account all taxes, even those that appear to be hidden.  By making certain tax elections you may be able to mitigate the impact of the Medicare Part B surcharge.

Below is a table outlining the monthly premiums for 2011.

More information can be found at: http://www.socialsecurity.gov/pubs/10536.html.

Monthly Part B Premiums for 2011
 
Income-related monthly adjustment amount

Total monthly
premium amount

Individuals with a MAGI of $85,000 or less
Married couples with a MAGI of $170,000 or less

$0.00

$115.40 Standard Premium

Individuals with a MAGI above $85,000 up to $107,000
Married couples with a MAGI above $170,000 up to $214,000

$46.10

$161.50

Individuals with a MAGI above $107,000 up to $160,000
Married couples with a MAGI above $214,000 up to $320,000

$115.30

$230.70

Individuals with a MAGI above $160,000 up to $214,000
Married couples with a MAGI above $320,000 up to $428,000

$184.50

$299.90

Individuals with a MAGI above $214,000
Married couples with a MAGI above $428,000

$253.70

$369.10
























If you are married and lived with your spouse at some time during the taxable year, but filed a separate tax return, the following chart will apply:

 
Income-related monthly adjustment amount

Total monthly premium amount

Individuals with a MAGI of $85,000 or less

$0.00

$115.40

Individuals with a MAGI above $85,000 up to $129,000

$184.50

$299.90

Individuals with a MAGI above $129,000

$253.70

$369.10


December 13, 2010

Medicare B Premium Surcharges in 2010

As part of the 2003 Medicare Prescription Drug Bill, a provision was added for a surcharge to be paid in addition to the normal Part B premium. This effectively "means tests" the amount of Medicare premiums you are paying. Those with higher Modified Adjusted Gross Income (MAGI) have to pay more for their coverage than those with lower Modified Adjusted Gross Income. This "surcharge" needs to be taken into account when doing your tax planning. It is particularly important today, considering the flurry of Roth Conversions taking place, as well as other income acceleration strategies. This "surcharge" is based on Modified Adjusted Gross Income, not your taxable income, so marginal tax rates are not a factor here; it, in essence, is a tax on your income (including tax-exempt income, EE bond interest used for educational purposes, and any foreign earned income) before deductions and exemptions. Don’t forget that the cash flow impact for married taxpayers is times two. The increase in premiums is not permanent; if your increase was the result of a one-time event and your MAGI subsequently falls below a threshold, your premiums will be reduced to those levels. So for many taxpayers the increase in premiums may be for only one year.

You will not see the increase in your premiums immediately once you cross one of the MAGI thresholds. To determine your MAGI, the Social Security Administration uses your most current tax return information provided by the IRS—typically, your tax return filed for two years prior (example: 2010 based on 2008 income tax return information).

In certain circumstances you can appeal the increase; however, one-time capital gain income and IRA liquidations (including Required Minimum Distributions) and Roth Conversions are not on the list of reasons to appeal.

If you have filed an amended tax return that has changed your MAGI, you will need to provide it to the Social Security Administration.

If you disagree with the Social Security Administration, you can appeal in writing by completing a request for Reconsideration (Form SSA-561-U2).  http://www.socialsecurity.gov/online/ssa-561.html

It is important to consider the real "tax" cost of financial transactions taking into account all taxes, even those that appear to be hidden. By making certain tax elections you may be able to mitigate the impact of the Medicare Part B surcharge.

Below is a table outlining the monthly premiums for 2010.


Montly Part B Premiums for 2010

 
Income-related monthly adjustment amount

Total monthly
premium amount

Individuals with a MAGI of $85,000 or less
Married couples with a MAGI of $170,000 or less

$0.00

$110.50 Standard Premium

Individuals with a MAGI above $85,000 up to $107,000
Married couples with a MAGI above $170,000 up to $214,000

$44.20

$154.70

Individuals with a MAGI above $107,000 up to $160,000
Married couples with a MAGI above $214,000 up to $320,000

$110.50

$221.00

Individuals with a MAGI above $160,000 up to $213,000
Married couples with a MAGI above $320,000 up to $428,000

$176.80

$287.30

Individuals with a MAGI above $213,000
Married couples with a MAGI above $428,000

$243.10

$353.60

If you are married and lived with your spouse at some time during the taxable year, but filed a separate tax return, the following chart will apply:

 
Income-related monthly adjustment amount

Total monthly premium amount

Individuals with a MAGI of $85,000 or less

$0.00

$110.50

Individuals with a MAGI above $85,000 up to $129,000

$176.80

$287.30

Individuals with a MAGI above $129,000

$243.10

$353.60



September 30, 2010

1099 Reporting Changes in the 2010 Small Business Jobs Act (signed into law on September 27, 2010)

There has been much discussion in the small-business community concerning the new 1099 reporting requirements, enacted by the healthcare bill, that are effective for years after December 31, 2011. While many industry groups, including the AICPA (American Institute of Certified Public Accountants), are lobbying for more relaxed law, it is considered a revenue-raiser by the government. A significant portion of that revenue will come from increased penalties for failing to file 1099s or filing them late. The 2010 Small Business Jobs Act significantly increases those penalties. Non-compliance just got real expensive; file all of them and file on time. Even if the provisions of the healthcare bill are relaxed, these penalties probably will still be with us. These provisions are effective for years beginning after December 31, 2010.

To offset a portion of the cost of the various tax breaks and incentives in the Act, Congress beefed up certain reporting requirements and penalties, to generate revenue. Expect a substantial increase in IRS audits to begin soon, and stronger enforcement of the penalties. This will be an easy exam for the IRS to administer; they probably will be able to do the exam without leaving their office. Don’t forget that we still have reasonable cause exception that may be applied to the penalties, but my guess is that the reasonable cause will require a lot more explanation and that fewer “causes” will be considered reasonable. “The dog ate the mail” may not work anymore. When filing the information returns, always get documentation that they (IRS) were received or, better yet, file them electronically. Here is what we have now:

Information reporting required for rental property expense payments. This will catch a lot of property owners by surprise. For payments made after December 31, 2010 (reporting will be for 2011 expense payments for most tax payers), the new law requires persons receiving rental income from real property to file information returns with the IRS and service providers reporting payments of $600 or more during the year for rental property expenses. The law now considers real property rental to be a trade or business subject to the 1099 reporting requirements. There are exceptions: individuals renting their principle residences (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship.

Increased information return penalties. For information returns required to be filed after December 31, 2010 (these penalties will apply to your 2010 1099s filed in January 2011), the penalties in the tax code for failure to timely file information returns to the IRS will be increased. For small businesses (gross receipts of less than $5M), the penalty increases from $15 to $30; calendar year maximum will be increased from $25,000 to $75,000 for the first-tier penalty. The first tier penalty is for correct information returns filed on or before the 30 days after the due date. The second tier penalty is for filing a correct information return after the 30 days but before August 1 of the calendar year in which the required filing date occurs; the penalty increases from $30 to $60 with a maximum for small businesses increasing from $50,000 to $200,000 per calendar year. For filings after the August 1 date the penalty increases from $50 to $100 with a maximum for small business increasing $100,000 to $500,000. The minimum penalty for each failure due to intentional disregard will be increased from $100 to $250, with no limit. The penalties for failure to file information returns to payees are also increased. These penalty amounts will be indexed every five years for inflation.

Just watching television and listening to radio would have you believe that the only tax increases coming are income taxes! But we know better. The good news is that this is a voluntary tax. Do it right, and it doesn’t cost you anything, other than the administrative costs of monitoring and preparing the reporting forms. Do it wrong and you will pay a non-deductible penalty, which means you had to earn the penalty amount plus your marginal tax bracket to satisfy the liability.

September 23, 2010

Stock Acquired in Demutualization

We have been receiving questions regarding recent letters sent to owners of Prudential stock held by Computershare. Why did I get this? What should I do? and How does this affect my taxes? are the primary concerns. This is primarily a tax issue; thus I won’t be commenting on the investment merits of owning Prudential Stock.

First, it is important to understand how the stock was issued to you, or how the person from whom you inherited the stock came to own it. For most of you reading this, it came about as a result of a demutualization. So here is the background:

A mutual insurance company has no shareholders, but instead is owned by its participating policyholders, who possess not only contractual insurance rights, but also ownership rights. Mutual owners’ voting rights differ from those possessed by traditional shareholders in that each policyholder has a single vote, regardless of how many policies are owned or the amounts thereof. Once the mutual company pays its claims and operating expenses, the profits belong to the policyholders. Typically, some of those profits are returned to the policyholders as dividends, while the remainder is retained as surplus. Payment of policy dividends is at the discretion of the policyholder elected board. A stock insurance company is owned by the owners of the stock; the policyowners only have contractual insurance rights.

Beginning in 1986, many mutual insurance companies began the process of demutualization (became stock insurance companies) by issuing stock to the policyholders in exchange for the ownership rights associated with their insurance contracts. The IRS’s position at that time was that the issuance of the stock in exchange for those rights would not be a taxable event. However, the IRS’s opinion was that the cost basis for the shares would be zero (IRS PLR 200020048), so if you sell it, the IRS’s position is that it is 100% taxable as capital gains.

Fast forward to: Eugene A. Fisher, Trustee of the Seymour P. Nagan Irrevocable Trust v. United States, US Court of Claims, 2008-2 USTC ¶50,481, Aug. 6, 2008, affirmed US Court of Appeals for Federal Circuit 2009-5001

The IRS loses; policyholders have basis in shares received in demutualization (absent otherwise determinable value, 100% of premium costs includible as basis). The IRS has yet to give us direction related to how they will treat this issue going forward for the rest of us taxpayers. We will keep you posted.  

Why should you consider selling the stock now? Tax reasons!

Long-term capital gains tax rates are on sale. (The Blue Light Special is on.)

For 2010, if you sell shares of stock that you’ve held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you’re in the 10% or 15% marginal income tax bracket, however, you’ll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you’re a married couple filing a joint federal income tax return, and your taxable income is $68,000 ($34,000 for single) or less, you pay no federal tax on the gain; state income taxes could still apply. Additionally, the sale could increase the amount of income tax you pay on Social Security benefits.

As of now, these rates expire at the end of 2010. (Watch for pending legislation.) Beginning in 2011, a 20% rate will generally apply to long-term capital gains.

As always, consult your tax advisor!
I would like to thank Ron Roberson, CPA (Twain Harte, CA), and Vern Hoven, CPA (Gig Harbor, WA) (www.hoven.com) for assistance in this post.


Martin James, CPA/PFS

About Us

Martin James Investment & Tax Management, both a CPA and Financial Planning Firm work together to provide a comprehensive plan designed to strengthen your financial position, as well as address the accounting and tax needs of closely-held businesses and high net worth individuals. With over 28 years of experience, we are committed to developing solutions that evolve as your financial, tax and technology environments change. Life changes, shouldn’t your planning consider those changes?
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September 21, 2010

Welcome to Our Blog

Welcome to our blog! This summer we have spent a considerable amount of effort in improving the technology within our office. The ultimate goal of this effort is to improve our communications and provide a higher-level of service. Please take a tour of our new blog.
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