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Friday, November 30, 2012

California Income Tax Rates

Due to passage of Proposition 30, the tax rate for 2012 income in California is 13.3% for taxpayers with state taxable income in excess of $250,000.  This change from the November 6, 2012 election is retroactive to income earned for the full year, since January 1, 2012.  Here is a summary of 2012 and 2013 California tax rates.

State sales tax rates are also increasing another .25%, up to a new base-level sales tax rate of 7.5% (before county/city tax) for every California taxpayer beginning January 1, 2013.  Even the poor get to enjoy this portion of Prop 30.

In Santa Clara County, where I live, the current sales tax rate is 8.375%.  This goes up to 8.675% on January 1, 2013.

Don't forget property taxes.  You will probably pay $15,000 to $25,000 a year in property taxes if you buy a home in Cupertino, Los Altos or Palo Alto, cities with top schools.

Los Altos, CA 940224 Beds 3 Baths

Sunnyvale, CA 94086 - 4 Beds 2 Baths
This "average home" in Santa Clara County will have property taxes of about $10,000 in 2013!

Monday, November 19, 2012

3.8% Medicare Surtax on Unearned Net Investment Income

This weekend a caller to Moneytalk asked Bob Brinker about the new tax on unearned income to fund Obamacare.  Brinker gave a "clarification" of the new 3.8% Medicare Surtax on "unearned" Net Investment Income which becomes effective starting Jan 1, 2013 for those with "Adjusted Gross Income" (AGI) exceeding $200,000 for taxpayers filing as "Single" and exceeding $250,000 for taxpayers filing "Jointly".

What bothers me about this tax is people like me who live in the expensive parts of California or New York who have very large capital gains on our homes bought long ago will have to pay this tax if we want to move or sell our home to move to a smaller, retirement home.  Much of the gain I have on my property  is due to inflation so the government has found a way to tax me on inflation it creates!

I found a very good summary of the new tax, who qualifies and how it will be implemented with a few examples at: 

Here is the gist:

Net investment income- Income received from investment assets such as bonds, stocks, mutual funds, loans and other investments  

Capital gain- When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for (or a capital loss if it is sold for less) 

Basis- the cost of an asset which includes the purchase price, shopping, installation, and other services associated with the asset

Adjusted gross income (AGI) - measure of income used to determine how much of your income is taxable and is calculated as your gross income from taxable sources minus allowable deductions, such as unreimbursed business expenses, medical expenses, alimony and deductible retirement plan contributions.

You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less  than your basis.

Who is subject to this tax?

Taxpayers with incomes or an adjustable gross income (AGI) over $200,000 who file individually or $250,000 for married couples filing jointly could be subject to this tax.  The provision imposes a 3.8 percent tax (identical to the combined employer/employee tax rates on earned income) on income from interest, dividends, annuities, royalties and rents which are not derived in the ordinary course of trade or business, excluding active S corporation or partnership income.  Gross income does not include items, such as interest on tax-exempt bonds, veterans’ benefits, which are excluded from gross income under the income tax.  If capital gains on a primary home sale exceed $250,000 for individuals or $500,000 for a married couple, and the income threshold is met, the excess realized gain is subject to the 3.8% tax.

How does this relate to the sale of a home?

There is no sales tax on home sales in the Reconciliation Act; instead, there is a tax which includes capital gains, rents, dividends and interest income that will only apply to taxpayers under limited conditions.  

When determining if an individual or a couple is subject to the 3.8% tax:
  • A home sale MAY result in a capital gain that increases net investment income
  • A home sale MAY result in a capital gain that increases a taxpayer’s AGI 
NOTE: When selling a home any profit is considered capital gain resulting in a taxpayer’s possible eligibility to qualify for the 3.8% unearned income tax. 

How is this different from the Medicare payroll tax?

Unlike the Medicare payroll tax, this is an unearned income tax.   Unearned income is the income that an individual derives from investing capital. It includes capital gains, rents, dividends and interest income.  

For more, read "New 3.8% Medicare Tax on "Unearned" Net Investment Income"

Tuesday, November 13, 2012

VWEHX Vanguard High Yield Fund - Bob Brinker's Junk Bond Fund Advice

Bob Brinker's comments on why he deleted the Vanguard High Yield (junk bond) Fund from his model portfolios  (Charts and quote at  VWEHX)

Moneytalk with Bob Brinker Commentary for November 11, 2012 Radio Show

Caller:  Why did you eliminate the Vanguard High Yield Fund from your newsletter Model Portfolio? Was that a call on the fund or something else? 

1-yr Chart

10-year chart

Bob said he saw the yield on that fund drop below 5% which is very unusual historically.  As a result of that decline in the yield, the net asset value of the fund rose so much that he regarded it as an opportunity to take profits. 

Kirk Lindstrom's Comment:  That is odd.  In the October 2012 Marketimer, Brinker shows VWEHX with a yield of 4.8% but the chart above shows the yield at about 6% and Google also shows the yield at over 6%.  

Checking Vanguard's website, I find the following yields as of 11/12/12:
This is a good lesson and reminder to ONLY trust the information on mutual funds that you get directly from the mutual fund companies.When I do the monthly updates for  "Kirk's Two Investment Letters"  I always go directly to Vanguard and Fidelity.  It is a good thing Brinker is paying attention! 

Bob noted that decision had nothing to do with the fact that the fund had closed to new investors.  If that fund had remained open, he would have made the exact same decision.  Bob added that even though the fund closed to new investors, it has done that in the past and then reopened at a later point in time. 

EC (David Korn): :The Vanguard High Yield Corporate Fund closed to new investors in May, 2012 because so much money had flowed into it in the prior six months (more than $2 billion).  The move did not limit current investors in the fund to contributing more, and if you are a cline of the Vanguard Asset Management Services or Vanguard Flagship Services, you can invest in it.  Learn more at this url:

The above commentary is courtesy of my writing partner, David Korn
David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.  Copyright David Korn, L.L.C. 2012
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