I think that our buddy uncle sam wants us to believe that he believes in family and at least claims to support families. Why though is it that they continue this $50,000 tax penalty on married couples?
Not sure which penalty I'm referring to? (are there that many? lol). I'm talking about the passive loss penalty.
The technical read is here: http://www.irs.gov/businesses/small/article/0,,id=146341,00.html
In a nutshell, as a taxpayer filing unmarried and single I have the benefit of taking up to a $25,000 loss on my "passive income" (investment properties) against my active income provided I make less than $100k/yr. This includes all the standard deductions investors take on their properties - repairs, mortgage, taxes, depreciation, etc. My $100k active income can be reduced to $75k if I had $25k in losses on my properties thereby directly affecting my tax bill.
OK, that's easy enough to understand and makes sense. It even seems pretty fair. What happens if I get married though? Penalties up the wazzoo is what happens.
First, this benefit is only applicable for those making $100k/yr or less. It phases out and is completely eliminated at $150k. But wait, we're two people instead of one right, so all the numbers should be doubled. It makes sense that for a joint return the benefit would begin losing it's value at $200k/yr, similar to most every other benefit in tax code for joint returns. But sneaky sam has never modified this particular credit to account for joint return. A joint return has the same $100k limit as a single application. If my wife brings home $25k/yr we only get half of the benefit or $12,500. If she brings home $50k/yr we completely lose out on the benefit.
To make things worse, what if I come into the marriage with 4 properties that have a $25k loss, and she comes into the marriage with 4 properties with a $25k loss and our combined incomes now exceed $150k. This is a worst case scenario because prior to marriage we both were able to take a passive loss deduction of $25k. After marriage, neither of us can take the passive loss deduction. That's $50k additional income we would be taxed on, or roughly $15k in taxes. Over a marriage lasting 40 years that's $600,000 extra we've been forced to pay sneaky sam because of this "glitch" in the tax system.
Now I know nobody wants to get started on taxes, it's a sore subject no matter what way we look at it; but I keep hearing about this particular issue with property investors who have passive losses and it's a big sore subject that keeps coming up year after year.
So what do CPAs have to say about this? I've interviewed several, and the same conclusion is that uncle sam does what uncle sam does and his purpose is to increase taxes, not reduce them. How to avoid the $50k penalty: a) don't have any losses, or b) don't get married
I, for one, hope some of our trusted(?) elected officials stand up to the IRS on this one someday and repair this flaw in the tax code. Since losses on a realestate rental are somebody elses taxable gain, as it stands now, it's double-taxation.
--- about the author ---
Nathan is a member of Rentec Direct who provides property management software, tenant ach payment processing, and Rentec credit reports.
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