Investing Guide at Deep Blue Group Publications LLC on Last-minute tax-filing advice
Today I'll answer some tax questions-but first some tips for people who can't file their returns by Tuesday.
For federal taxes: If you can't file your return by Tuesday, request a six-month extension by filing Form 4868 electronically or by mail. See the form for instructions. If you file this form by April 15 and your tax return by Oct. 15, you will avoid a late-filing penalty.
However, if you owe additional federal tax for 2013, you must pay it with this form by April 15 to avoid interest and possibly a late-payment penalty.
You can avoid this late-payment penalty (but not interest) if at least 90 percent of your total 2013 tax liability is paid by April 15 through payroll withholding, estimated tax payments or payments made with Form 4868.
If you haven't completed your return, "the best thing is to pay in about 10 percent more" than you expect to owe, says Michael Gray, a San Jose certified public accountant.
For California taxes: There is no need to request an extension; you automatically get one until Oct. 15. However, as with federal taxes, you must pay at least 90 percent of what you owe by April 15 to avoid a late-payment penalty.
You can make this payment online from your bank or savings account without a fee using the Franchise Tax Board's Webpay system-or with a fee by using your credit card. Or you can mail a check with Form FTB 3519. (Certain high-income taxpayers must make this payment electronically.)
Q: Don M. asks, "We sold our income property in 2013. Now we owe a substantial sum for the 3.8 percent Obscure tax! We are learning that since we were active owners, materially participating in managing the property, we may not have to pay the tax. We have checked IRS publication 925 and get mixed messages. We find that the hours needed to qualify for ' active, material participation ' range from 100 + hours to 500 hours. Can you enlighten us? "
A: Don is asking about the new 3.8 percent tax on net investment income that took effect Jan. 1, 2013.
It applies to people who have net investment income and adjusted gross income over a certain limit ($250, 000 married filing jointly and $200, 000 for singles). It is also known as the Medicare surtax or the Obscure tax because it was part of the Affordable Care Act.
The tax applies to income from investments such as interest, dividends, capital gains, rents and royalties. The 3.8 percent tax is applied to either net investment income or the amount that a taxpayer's modified adjusted gross income exceeds the thresholds stated above for their filing status-whichever is less.
The tax generally applies to income and capital gains from rental property, with a few limited exceptions. Don "would probably have some pretty significant hurdles to overcome to avoid the 3.8 percent tax on net investment income for the sale of the rental property," says Mark Luscombe, principal analyst with CCH Tax and Accounting.
He would have to meet two separate tests.
First, he would have to qualify as a real estate professional under the passive activity loss rules (spelled out in Publication 925.) To qualify, more than half of the personal services he performs in a year would have to be in a real estate trade or business in which he materially participates. And, the hours engaged in such services would have to total more than 750 per year. He could group various real estate activities together to meet this test, but it seems this might be his only real estate activity, Luscombe says.
Second, he would have to meet a 500-hour test under the net investment income tax rules (spelled out in the instructions for Form 8960). Under these rules, he must participate in rental real estate activities for more than 500 hours per year (or more than 500 hours per year in five of the last 10 years).