Texas Oil and Gas Attorney Blog
There seems to be a steady stream of good news as the oil and gas industry in Texas continues to show signs of expansion. However, one potential problem area which might impact our growing economy relates to taxes. It remains to be seen how some of the President’s tax proposals may affect the industry and its operation. For example, “Obamacare,” officially called the Affordable Care Act, was recently upheld as constitutional. On January 1st of this year, the so-called “Medicare tax” portion of the bill went into effect, creating an investment surtax on rental income properties. The tax is 3.8%, and will not affect real estate companies or full time real estate professionals managing properties. To qualify for an exemption, the person must show that they spent over 500 hours a year (about two hours a day) managing or operating the properties and/or show that they are managing the properties as their livelihood.
Who Is Affected?
This tax will hit, and hurt, mostly hard working professionals who have regular full-time jobs but who also have real estate investments on the side. The tax will apply to married couples earning more than $250,000 a year and individuals making over $200,000 annually.
It will also hit other types of investments, such as capital gains, dividends, and interest earned from bonds and bank accounts. The new tax allows a choice of application to either the taxpayer’s net investment income or the amount of adjusted gross income that exceeds the thresholds, whichever is less.
Investments always carry risks, but also bring rewards, not only for the investor, but for the economy as a whole. Investment is needed to keep the economy growing, which is why these added taxes can be problematic. And while this investment tax is aimed at the upper class, most of the people affected are hard working professionals, who often have education expenses that take years to pay down and who use these investments to save for their retirement.
In addition to this new investment tax, Medicare tax on income is also increasing for the same level wage-earners this year: $200,000 for individuals and $250,000 for married couples. It will be up 0.9 percent and will be withheld from paychecks. That means last year’s 2.9% withholding will now be 3.8%.
The investment tax could have been part of the recent negotiations regarding the fiscal cliff. But it was not included in the negotiations, which leads experts to believe that the tax is here to stay. The fiscal cliff deal ended up raising the income tax only on individuals making more than $400,000, or married couples making $450,000–higher exemption levels than the President originally proposed. An accounting professional from Massachusetts, Jim Guarino, told the Wall Street Journal that the investment tax is a little more palatable now, since the $200,000/$250,000 tax bracket will not be hit with higher income taxes from the fiscal cliff deal. However, only time will tell if overall investments, including those in the oil and gas industry, will be affected by these tax changes.
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