10 wealth tax issues you may not know about

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 Tax Cuts and Jobs Act (TCJA).

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%).¹ This is one of two taxes created in 2013’s Patient Protection and Affordable Care Act.

Although the TCJA repealed the ACA’s individual mandate starting in 2019, the Medicare surcharge remains in place.
 

¹ Questions and Answers for the Additional Medicare Tax, Internal Revenue Service.

When U.S. citizens 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 by withholding that country’s tax on that income.

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.²
 

² Foreign Tax Credit, Internal Revenue Service.

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 when the benefits are paid.³
 

³ Taxpayers Living Abroad, Internal Revenue Service.

The alternative minimum tax (AMT) was designed to limit wealthier taxpayers from sidestepping the individual income tax.

The TCJA does not change AMT rates (26% or 28%) levied at an almost flat rate on taxable income above an exemption. However, there are major changes for exemptions:⁴

•   For single filers, the current exemption is $72,900 and starts to phase out at $518,400.

•   For those married and filing jointly, the current exemption is $113,400 and starts to phase out at $1,036,800.
 

⁴ 2020 Tax Brackets, Tax Foundation.

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.⁴

The tax brackets go back to their original rates in 2026.
 

⁴ 2020 Tax Brackets, Tax Foundation.

You can no longer 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.⁵

⁵ “Analysis of the SALT Act,” Tax Foundation, March 11, 2019.

The mortgage interest deduction is limited to the interest calculated on up to $750,000 of qualified residence loans.

For those with existing mortgages incurred before Dec. 16, 2017, a higher limitation of $1 million still applies.
 

⁶ Home Mortgage Interest Deduction, Internal Revenue Service. 

If you make a lot of money, be aware that the tax authorities probably notice.

While the IRS audited only 0.59% of individual income tax returns in 2018, the lowest audit rate since 2002, the audit rate remains highest for high income taxpayers⁷.

⁷ “IRS Audit Rate on the Rich Collapses,” Forbes, May 20, 2019.

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.

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.