Tax Bracket Increase?

[DLuke11]

My wife and I file jointly and our gross income from both of our full time W-2 jobs combined will be roughly $80,000. That will put us in the 12% Fed tax bracket. However we bought an investment property, rehabbed it, and sold it for a profit within 5 months. Since it was a short term investment we have to pay capital gains at our normal income bracket on the profit. After all expenses and holding costs were deducted, we had a total profit of roughly $60,000. We also have another investment property we bought 4 months ago, we are in the process of rehabbing and plan to sell before year end. We expect to make around the same profit of $60,000 on that flip as well. With that in mind I have a few questions about our taxes for this year.

1. Will our tax bracket be increased to the next tear at 22% due to the sale of the investment properties? Our total income would be around $200,000 gross if the second flip house sells for a $60,000 profit. ($80k+$60k+$60k)

2. If so, will that also increase the amount we needed to withhold from our W-2 income? Since we had been in the 12% tax bracket we had our employers withhold only enough to cover the 12% taxes that would be due. However, now we are being moved up to a 22% bracket there is an increase of 10% that wasn’t withheld. Should we expect an additional 10% to be taxed on our $80,000 W-2 income when we file our taxes? (About $8,000)

[DawnCo · Accepted solution]

Hi DLuke11, 

Thanks for attending event today.

Yes the sale of property will push you into another tax bracket.

Long-term capital gains cannot push you into a higher income tax bracket. Only short-term capital gains can accomplish that, because those gains are taxed as ordinary income. The same as you W2 income So any short-term capital gains are added to your income for the year.

This tool can help you with estimating that: https://turbotax.intuit.com/tax-tools/calculators/tax-bracket/

Your W2 income is not taxed additionally. The additional tax assessed is on your short term capital gains for sale of property.

In some situations in the sale of property, you can choose to withhold taxes.(if this occurs make sure that is entered in your tax return) If this is not possible, then you would want to go make an estimated tax payment for the sale of property at estimated tax bracket percentage at https://www.irs.gov/payments/direct-pay and at your state level as well. 

[DLuke11]

Thank you for your answer. Are you able to answer a few more questions or should I start another thread?

If you can answer them on this thread here are my other questions. If not I will start another thread. Thank you again.

3. Will we need to pay self employment taxes (15.3%) on the profit from the flips even though my wife and I both have full time W-2 jobs and the flips are something we did on the side?

4. If so, our total tax bill for the initial flip profit of $60,000 would be… 22% Fed + 8.75% State (OR) + 15.3% Self Employment = 46.05% Tax. Based on that we would owe $27,630 in tax and our profit after taxes would only be $32,370. Does that all seem correct? I want to be sure we are setting enough aside for the tax bill.

5. Are we able to put any of the pre tax profit into a retirement account with an investment brokerage and not have to pay taxes on that part? Example: profit of $60,000, we invest $15,000 (25%) into a retirement account. Now we only show a $45,000 profit that we will be taxed on.

6. Will I need to hire a CPA or go to a tax preparer for the above scenario or will I still be able to use and input all this with Turbo Tax?

On an unrelated note,

Are we able to claim depreciation for our personal home we own and live in? If so, how much can we deduct each year?

[DawnCo]

You are correct. You will be subject to Self employment tax. You are considered a Dealer from your description of buying and selling without renting properties. With that being said. You will also have additional deductions that can be written off in your small business. Also a credit for 1/2 Self employment tax and a Qualified Business income deduction.

Here is a guide to small business deductions:

https://turbotax.intuit.com/tax-tips/small-business-taxes/taking-business-tax-deductions/L5RueYPVS

Here are 2 links to help understand tax implications:

https://blog.turbotax.intuit.com/self-employed/5-tax-implications-and-tips-if-you-flip-things-for-pr...

https://www.propstream.com/real-estate-investor-blog/flipping-houses-and-taxes-what-you-need-to-know

Yes, You can put money into a retirement account to lower taxable income. This does have limits. 

https://turbotax.intuit.com/tax-tips/retirement/boost-your-retirement-savings/L3lryQHVz 

Please remember these limits apply to all retirement accounts. Employer and Self Created.

Yes, TurboTax has the ability to help you prepare these returns. Since this is a new venture and you do not have experience,  I would recommend having it prepared for you. 

[DLuke11]

Thank you very much!

[DawnCo]

You are very welcome. I love that you are being proactive. Please use the links to learn more to prepare for upcoming tax season.