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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2012
CCH Whole Ball of Tax
is available in print. Please contact:
Leslie Bonacum
(847) 267-7153
Eric Scott
(847) 267-2179

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at

2012 CCH Whole Ball of Tax
Release (12) | Back to WBOT

2012 CCH Whole Ball of Tax

Leslie Bonacum
, 847-267-7153,
Eric Scott, 847-267-2179,

CCH Reviews Challenges for High-income Taxpayers: Fewer Overseas Tax Shelters, Medicare Tax and Sunset of Bush-Era Tax Cuts Looming  

(RIVERWOODS, ILL., January 2012) – While no broad-based tax on higher-income earners has moved forward, several incremental changes to the tax code are designed to close loopholes and require more affluent taxpayers to pay higher taxes, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (

“Higher income taxpayers are audited more and the IRS is increasing its audits, particularly in the international arena,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “These taxpayers have available to them more strategies to minimize their taxes, while the IRS is looking to ensure it’s closing the tax gap.”

(For audit rates see Release 27.)

Among areas of the tax code changing that will affect wealthier taxpayers are increased reporting of financial assets through the Foreign Account Tax Compliance Act (FATCA), in effect for the 2011 tax year, and the Medicare tax surcharge, which goes into effect next year. Below, CCH reviews these issues.

(For a discussion on estate planning issues for affluent taxpayers, see Release 15.)

More Reporting Requirements for Foreign Financial Assets

FATCA, a part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, was enacted with the hopes of helping to discourage tax evasion by U.S. taxpayers holding investments in offshore accounts. Starting in tax year 2011, the law requires taxpayers to report certain foreign financial assets to the IRS.

FATCA applies to single taxpayers living in the U.S. with foreign assets totaling more than $50,000 on the last day of the tax year or more than $100,000 at any time during the tax year. These thresholds double for married taxpayers filing joint returns and living in the U.S. For U.S. taxpayers living overseas and meeting additional requirements, the threshold is higher. They are required to report if their foreign financial assets are more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year.

Under FATCA, financial assets include financial accounts maintained by a foreign financial institution; other foreign financial assets, including stock or securities issued by someone other than a U.S. person; interest in a foreign entity; and financial interests or contracts that have a non-U.S. issuer or counterparty.

“While the law is generally aimed at discouraging wealthy individuals from moving income offshore to avoid taxes, it also could apply to other taxpayers who may be caught unaware of the new law,” said Luscombe. “For example, someone who had inherited foreign assets and had continued to hold them outside the U.S., or U.S. taxpayers living overseas and maintaining foreign accounts but not maintaining the specific residency requirements needed to be exempt from FATCA.”

FATCA requires taxpayers to report their financial assets on a new form, Form 8938, and file it with their tax return. Taxpayers failing to report foreign financial assets face a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent. Taxpayers also must still comply with filing requirements of Reporting of Foreign Bank and Financial Accounts (FBAR).

In addition to requirements on taxpayers, FATCA requires foreign financial institutions to report certain information directly to the IRS starting in 2013.

Additionally, in another move to increase reporting and collection from offshore accounts, the IRS in early 2012, reopened the Offshore Voluntary Disclosure Program (OVDP). This third program (programs also were offered in 2009 and 2011) is the first without a fixed end date. Participants face a penalty of 27.5 percent on the highest balances held in foreign accounts or entities over the eight years before disclosure. In limited situations, some taxpayers may qualify for a lower penalty. The previous two OVDPs collected more than $4.4 billion, according to IRS data.

Planning to Minimize Medicare Surcharge Taxes

The Patient Protection and Affordable Care Act (Patient Protection Act) passed in 2010, included two new Medicare taxes on higher income individuals: a 3.8-percent tax on investment income and an additional 0.9-percent tax on wages and self-employment income. Both taxes go into effect in 2013 and apply to individuals with an adjusted gross income (AGI) above $200,000 and joint filers with AGI above $250,000.

In addition, the Bush-era tax cuts are set to expire at the end of 2012, resulting in among other things, the capital gains top rate increasing from 15 to 20 percent.

“This is the first time there will be a Medicare tax on investment income,” said Luscombe. “Add to this the increase in capital gain rates and people have very strong motivation to look at options for shifting to tax-advantaged investments to minimize taxes for 2013 and beyond.”

Under the Patient Protection Act, the Medicare investment tax applies to interest, dividends, royalties, rents and gains from disposing of property. It also applies to income earned from a trade or business that is a passive activity. Self-employed individuals, as well as estates and trusts, would also be liable for the additional tax. However, distributions from qualified retirement plans – including pensions and income from IRAs, 401(k), 403(b) and 457(b) plans – will be exempt from paying the additional tax.

In trying to minimize the impact of the Medicare surcharge on investments, most taxpayers have few options available to them outside retirement accounts. One is tax-free municipal bonds, which do not require investors to pay tax on interest; however, they tend to have a lower return than other investment alternatives.

In attempts to lower taxes in anticipation of the return of the Bush-era tax cuts, more affluent taxpayers may also consider converting traditional IRAs to Roth IRAs. Traditional IRAs are deductible from income tax in the tax year in which the contribution is made. However, required minimum distributions (RMDs) start at age 70½ and any other distributions are taxed as ordinary income. Additionally, if someone does not require the income immediately in retirement and taxes increase, they will then trigger additional taxes at that later time of distribution. Conversely, contributions to Roth IRAs are made after-tax and are therefore nondeductible. However, “qualified” distributions are taken free of tax and with Roth IRAs there is no requirement to take distributions, allowing people to pass the proceeds onto their heirs.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business ( is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Follow us now on Twitter @CCHMediaHelp. Wolters Kluwer ( is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands.

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