Tax Updates on Health Reform and Foreign Financial Interests

Types : Alerts

To pay for the new health reform law, Congress has enacted two new Medicare taxes that will apply to high income taxpayers beginning in 2013.

The first tax is a .9% addition to the Medicare payroll tax on wages.  Currently the tax is 2.9% on all wages – the employee and the employer each pay 1.45%.  A self-employed person pays the entire 2.9%.  Beginning in 2013, an employee with wages of more than $200,000 who files as a single taxpayer will pay 2.35% instead of 1.45%, and a self-employed individual with self-employment income of more than 200,000 who files as a single taxpayer will pay 3.8% instead of 2.9%.  The increased levels of 2.35% and 3.8% will apply to married couples filing jointly with wages and self-employment income, respectively, in excess of $250,000.  The $200,000/$250,000 wage and self-employment income levels are not in indexed for inflation.

The second tax is a 3.8% tax on net investment income, defined as the sum of: (1) gross income from interest, dividends, annuities royalties and rents, unless derived in the ordinary course of a trade or business; (2) other gross income from a passive trade or business; and (3) the net gain attributable to the disposition of property other than property held in a trade or business that is not passive less deductions properly allowable to such income.

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In an effort to close the tax gap and prevent tax avoidance by U.S. persons with interests in foreign accounts, Congress has enacted sweeping new provisions to encourage foreign financial institutions to report information about certain U.S.persons and their foreign accounts.

Unless a foreign financial institution enters into an agreement with the IRS to provide the required information about U.S. accounts of specified U.S. persons and U.S.-owned foreign entities, every withholding agent (defined broadly to include any person in whatever capacity having control, receipts, custody, disposal or payment of any “withholdable payment”) must deduct and withhold a tax equal to 30% on any “withholdable payment” to the foreign financial institution.

A specified U.S. person is any U.S. person with exceptions, including for publicly traded corporations, tax-exempt organizations, individual retirement plans, governmental entities, banks, REITs, and RICs.  A U.S.-owned foreign entity is any foreign entity that has one or more substantial U.S. owners, generally defined as a greater than 10% owner.  The new law is generally effective for payments made after 2012.

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Generally, a U.S. person with a financial interest in or signature or other authority over one or more foreign financial accounts with a value of at least $10,000 during the year must file a Form TD F 90-22.1 (called an “FBAR filing”).  For tax years beginning 2011, a U.S. individual with specified foreign financial assets with an aggregate value exceeding $50,000 during a year must provide information about those assets on a schedule attached to Form 1040.  In addition to assets generally considered financial assets to which the FBAR filing requirements apply, specified foreign financial assets includes stock or securities issued by a foreign person and interests in foreign entities.

There is a penalty of at least $10,000 if the disclosure is not made by the required date.  In addition, any understatement of tax attributable to an undisclosed foreign financial asset is subject to a 40% penalty.

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