Tag Archives | tax reality

Bitcoin: IRS says, “It’s property, and it’s taxable!”

A lot of people are still trying to figure out just what Bitcoin is, but the IRS has seen enough to decide: It’s a type of property and not a form of currency.

So what, you say? Here’s what: Because, as The New York Times has reported, the IRS is going to treat Bitcoin as property, people who buy and sell it are going to have to calculate the change in value from when they acquired it, and pay tax (or claim losses) on the difference.

That means you could buy Bitcoin, use it to purchase something, and then have to report a “trade” on the change in Bitcoin value between when you bought it and when you used it.

Oh, and if you’re one of those smart guys or gals who can actually electronically “mine” a Bitcoin, you are going to have to report the market value of the Bitcoin as income.

Make more than $200K? Your taxes are (probably) going up

Remember all the talk after the 2012 election about tax hikes? Well, they’re here–but you’re probably going to be affected only slightly, or not at all, if you are earning less than six figures. However, once you get above $200,000 of total income, you’re almost sure to see a hike in your tax bill this year.

The most significant increases affecting higher-income earners this year include:

–The new 3.8% Net Investment Income Tax on singles with modified adjusted gross income of more than $200,000 ($250,000 for joint filers.) As Brent Hunsberger of The Oregonian points out, this tax on investment income includes real estate income. Remember that real estate income is ordinary income, so this is a 3.8% tax on top of whatever your ordinary marginal tax rate already is. (Department of Shameless Self-Promotion–Hunsberger quotes Yours Truly in his article.)

–A Medicare Tax increase of 0.9% . You are subject to this if you have wages and/or self-employment earnings of more than $200,000; $250,000 for joint filers. Note: Because employers don’t know all of your sources of income, they cannot withhold this additional tax. You’ll be reporting it yourself on the all-new Form 8959.

–An increase in the top rate on long-term capital gains and qualifying dividends to 20%, instead of 15%. This hits people with taxable income above $400,000; $450,000 for joint filers.

–An increase in the top marginal tax rate, from 35% to 39.6%. Again, only the highest earners–people with more than $400,000 of taxable income, $450,000 for joint filers–are affected.

The biggest problem for folks who are affected by all of these increases? Maybe it’s figuring out where the few people are with whom you can commiserate. As this handy-dandy calculator from Kiplinger’s shows , people with adjusted gross income for $400,000 or more are in the top 1% of income earners nationwide.

Super-rich have super-low tax rates, in super times or bad ones

Let’s stop a moment to reflect on the tax lives of the 400 highest-earning Americans, and how they suffered in the Great Recession of 2008-2009.

Oh, wait a minute—they didn’t suffer. As James B. Stewart points out in The New York Times, the fortunate 400 still averaged $202 million apiece in adjusted gross income in 2009. Perhaps even more extraordinary, they paid an average federal income tax rate of less than 20%–less than people in the top 1% (adjusted gross income of at least $344,000) and quite possibly less than you.

How did they do it? Well, more than half of their income came from capital gains and qualifying dividends, which were taxed at the preferential rate of 15%, compared to wages and other income that could be taxed as high as 35%.

Is there any sound reason for taxing earnings from capital at half the rate or less than earnings from one’s labor? Not really. No less a financial heavyweight than Pimco mutual fund co-founder Bill Gross wrote in his November investment outlook that, “The era of taxing “capital” at lower rates than “labor” should now end.”

If that ever happens, we’ll be back to one of the features of The Tax Reform Act of 1986, under which capital gains and wages were taxed equally. That bill was promoted and signed by that well-known enemy of the wealthy . . . Ronald Reagan.

Now that’s a home run: McCourts back in court over billion-dollar Dodgers franchise

Nasty multi-million dollar divorces make for some great financial insights, especially when they wind up in court.

Today’s lesson: How profitable it can be to own a professional sports franchise, and how the tax code’s preferential rates for capital gains benefit the super-wealthy.

Frank McCourt owned the Los Angeles Dodgers. When he and his wife Jamie divorced, Jamie got $131 million as a settlement.

They were back in court this week. The reason: Shortly after the divorce, Frank sold the Los Angeles Dodgers for $2.15 billion. Jamie’s lawyers say the settlement should be thrown out because she was misled about the value of the team. (Isn’t it entertaining when people fight over hundreds of millions of dollars?)

The tax angle: Court documents show that Frank made $1.278 billion on the sale. His lawyers say he has paid more than $460 million in state and federal taxes on the sale.

If you’re keeping score at home, that’s a combined federal-and-state tax rate of about 36%, or roughly the same percentage that a single person in California would have to pay on ordinary taxable income of more than $90,000.

“Mean”states crush the poor, feds pick up the pieces

Most talk about tax fairness focuses on federal income tax rates and how much the wealthiest pay. But states collect billions in taxes also, and as Katherine S. Newman writes in the Opinionator blog section of The New York Times, state tax systems tend to be more regressive than the federal system, and most regressive in Southern states and the West.

“Southern states have steadily increased the tax burden on their poorest citizens by shifting the support of the public sector to sales taxes and fees for public services. After California voters passed Proposition 13, which capped property-tax increases, in 1978, Western states began to move in a similar direction,” she writes. “Sales taxes on clothing and school supplies and fees for bus fare and car registration take up, of course, a far bigger slice of a poor household’s budget than they do from the rich.”

Newman points out that we all pay for regressive tax systems in what she calls “mean” states, regardless of where we are. “The more the poor are taxed, the worse off they are, whether they are working or not. We all pay a huge price for this shortsightedness. Medicaid payments, food stamps, disability benefits — all of these federal programs swoop in to try to patch up a frayed safety net. Consequently, the Southern states reap more dollars in federal benefits than they pay in taxes (like Mississippi, which saw a net gain of $240 billion between 1990 and 2009), while the wealthier states — which do more to take care of their own — lose out for every dollar they pay (like New Jersey, which handed over a net of $706 billion over that same period.)”

You can find the whole article, with something to annoy just about anyone, here .