The Short Answer:
Not for most homeowners.
The Long Answer:
The new bill does provide for a 3.8% tax on capital gains, including real estate investments. Capital gains include investment income and not earned income. For example, your paycheck is earned income, the increase in the value of your stock is a capital gain. So if you buy your house for $400K in 2000, and sell it for $1 million in 2013 (wouldn't that be nice?), the $600K you make is a capital gain that can be taxed.
In tax terms, the $400K you spent on the house is your basis, and it gets subtracted from the sale price to determine your gain.
There is also an exclusion for the sale of a personal residence. The exclusion amount is $250K for single people and $500K for married couples. So for a married couple selling the above referenced house, the first $500K of gain would not be taxed. Their gain would only be counted as $100K, and their tax liability would be 3.8% of $100K, or $3,800.
This seems like a lot still, but there is another factor to consider. The price you pay for your home is not the only thing that affects your basis. Home improvements also count toward reducing your gain and hence your tax liability. Let's say that the married couple spend $30K on some new appliances and hardwood flooring. They can add that $30K to their basis of $400K (the amount they paid for the house). If their basis is $430K, when they sell the house for $1 million and exclude the first $500K of gain, their net gain is only $70K. 3.8% of $70K is $2,660.
The bottom line is that even if a taxpayer has a very large gain on his or her home, the new capital gains tax won't have that big of an effect.
Note: It does not matter that you paid for the house with a mortgage, the purchase price of the house is still your basis, because you made yourself liable for that amount on your mortgage.
Who will be affected by the tax?
Owners of commercial or rental property will not have the personal residence exclusion to buffer the effects of the tax, and single people will be hit harder by the new capital gains tax.
One further Note:
This 3.8% increase is on top of the regular capital gains tax, which increased from 15% to 20% in 2011. The 5% increase applies now. The 3.8% increase will take affect in 2013.
Saturday, January 22, 2011
Wednesday, January 12, 2011
Congress Just Says No to Tanning Beds
With the massive number of provisions in the health care bill, it's taken a while for everyone to process the minutia of the thing. Now that tax season is here, the parts of the bill that create new tax liabilities are becoming more apparent.
One such provision is the new ten percent excise tax on indoor UV tanning services. The excise tax falls into the category of "sin" taxes, like those imposed on profits from selling cigarettes or running casinos. Sin taxes have been around almost as long as taxes have in the U.S., and are the government's way of discouraging behaviors that society deems risky, to the benefit of the Treasury.
Scientific studies have inevitably shown the strong link between excessive tanning and skin cancer, and most people would agree that the industry should have some government regulation, particularly with regard to use by teenagers, who are at the highest risk for exposure to UV rays. Some states have enacted laws to regulate the tanning bed businesses and others have declined to do so.
While cigarettes and excessive tanning are issues that affect our nation's health, are higher taxes on these products and services effective in reducing the problems they cause? Many would argue that cigarette use is unaffected by increased price, because most smokers become addicted before buying cigarettes and those who are already addicted will pay any price. Can the same be said for tanners?
A more important question is whether the federal government should be stepping in to regulate "sins" at all. If a product or service is truly dangerous to our health, then perhaps the states should regulate or criminalize it. Otherwise, it seems to me that a system where the government is making money off of health hazards creates an incentive to keep those health hazards around.
Once a tax is created, more programs are introduced to spend the money raised by the taxes. However, if the revenue from the newly created tax is less than projected, the corresponding new spending is not reduced. Therefore if a sin tax "worked" in the sense that it decreased the behavior it was meant to discourage, the national debt would increase as a by-product.
One such provision is the new ten percent excise tax on indoor UV tanning services. The excise tax falls into the category of "sin" taxes, like those imposed on profits from selling cigarettes or running casinos. Sin taxes have been around almost as long as taxes have in the U.S., and are the government's way of discouraging behaviors that society deems risky, to the benefit of the Treasury.
Scientific studies have inevitably shown the strong link between excessive tanning and skin cancer, and most people would agree that the industry should have some government regulation, particularly with regard to use by teenagers, who are at the highest risk for exposure to UV rays. Some states have enacted laws to regulate the tanning bed businesses and others have declined to do so.
While cigarettes and excessive tanning are issues that affect our nation's health, are higher taxes on these products and services effective in reducing the problems they cause? Many would argue that cigarette use is unaffected by increased price, because most smokers become addicted before buying cigarettes and those who are already addicted will pay any price. Can the same be said for tanners?
A more important question is whether the federal government should be stepping in to regulate "sins" at all. If a product or service is truly dangerous to our health, then perhaps the states should regulate or criminalize it. Otherwise, it seems to me that a system where the government is making money off of health hazards creates an incentive to keep those health hazards around.
Once a tax is created, more programs are introduced to spend the money raised by the taxes. However, if the revenue from the newly created tax is less than projected, the corresponding new spending is not reduced. Therefore if a sin tax "worked" in the sense that it decreased the behavior it was meant to discourage, the national debt would increase as a by-product.
Monday, January 10, 2011
Tax Season is Upon Us!
It's that time of year again, time for pulling out those receipts and hanging onto those W-2's. It's time to complete those tax returns, and for those of us hoping for a refund this year, here is what you need to know about how soon you can file:
For most taxpayers, you should be able to file starting January 14th. However, because some of the new tax laws were enacted just this December, certain tax payers should wait until mid- to late February to take full advantage of the new changes.
You should wait to file if:
* You will be itemizing deductions on a Schedule A. Some examples of itemized deductions are mortgage interest, charitable deductions, medical and dental expenses and state and local taxes.
* You will be claiming the Higher Education Tuition and Fees Deduction. This deduction allows you to reduce your taxable income by up to $4,000 in tuition and fees paid to a post-secondary institution (college). NOTE: The delay for this deduction does not effect taxpayers who are claiming other education credits, including the American Opportunity Tax Credit and the Lifetime Learning Credit.
* You are claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 teachers with out-of-pocket classroom expenses of up to $250.
For most taxpayers, you should be able to file starting January 14th. However, because some of the new tax laws were enacted just this December, certain tax payers should wait until mid- to late February to take full advantage of the new changes.
You should wait to file if:
* You will be itemizing deductions on a Schedule A. Some examples of itemized deductions are mortgage interest, charitable deductions, medical and dental expenses and state and local taxes.
* You will be claiming the Higher Education Tuition and Fees Deduction. This deduction allows you to reduce your taxable income by up to $4,000 in tuition and fees paid to a post-secondary institution (college). NOTE: The delay for this deduction does not effect taxpayers who are claiming other education credits, including the American Opportunity Tax Credit and the Lifetime Learning Credit.
* You are claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 teachers with out-of-pocket classroom expenses of up to $250.
Saturday, January 8, 2011
Starting a Law Practice
My husband and I are officially starting a law partnership in September 2011. In order to make this happen without going into even more debt, we will need to put some serious moulah in the bank before then.
This is where my new solo practice comes in. Yes, that's right. Grace S. Byrd, Esq. will be up and running, God willing, by February 1st. I'm writing up my business plan as we speak. I registered with the state and got a tax id number. I'm going back to TDBank tomorrow to finalize my business and trust accounts.
To start out I'm just going to advertise to do people's taxes to meet more potential clients. Then I'm going to go to every CLE class that I can afford to figure out how to actually practice law. (What? You didn't pick that up in law school). Then I'm going to take every lawyer I know out to lunch and hound them for advice. Finally, I might end up taking some pool cases (the cases that the public defenders are too busy to take.)
Come hell or high water (or a baby who refuses to nap) I am going to practice some law!
God help me.
This is where my new solo practice comes in. Yes, that's right. Grace S. Byrd, Esq. will be up and running, God willing, by February 1st. I'm writing up my business plan as we speak. I registered with the state and got a tax id number. I'm going back to TDBank tomorrow to finalize my business and trust accounts.
To start out I'm just going to advertise to do people's taxes to meet more potential clients. Then I'm going to go to every CLE class that I can afford to figure out how to actually practice law. (What? You didn't pick that up in law school). Then I'm going to take every lawyer I know out to lunch and hound them for advice. Finally, I might end up taking some pool cases (the cases that the public defenders are too busy to take.)
Come hell or high water (or a baby who refuses to nap) I am going to practice some law!
God help me.
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