Bracing yourself for higher taxes
In 2013 a slew of new and increased taxes are set to be unleashed on individual taxpayers. Two of these taxes are the result of the 2010 Health Care legislation and will directly impact many of our clients.
Beginning January 1, 2013 an additional 0.9% Hospital Insurance (HI) tax will be imposed on “high-income” taxpayers who are defined as single individuals with $200,000 or more of wages or self-employed income per year, $250,000 for married filing joint and head of household filing statuses and $125,000 for married filing separate individuals. This tax effectively raises the current employee-portion of the medicare tax from 1.45% to 2.35% for wages or self-employed income earned in excess of the above limitations. The additional tax is required to be withheld when an individual taxpayer’s wages are more than $200,000, but that does not take into account a spouse’s earnings. Situations in which both spouses work but neither reach the $200,000 level individually may find themselves owing an additional 0.9% on their salaries come tax time. An adjustment of current withholding levels may be necessary, especially in dual income households, for taxpayers that may be subject to this additional tax.
The second tax is the additional 3.8% unearned income Medicare contributions tax (UIMCT) on net investment income. This is for taxpayers with modified adjusted gross incomes (MAGI) in excess of $250,000 for married filing joint and head of household taxpayers, $125,000 for married filing separate taxpayers and $200,000 for single taxpayers. MAGI is essentially adjusted gross income (AGI) for most taxpayers, with some adjustments for taxpayers taking advantage of the foreign earned income exclusion. This new tax is applicable to net investment income, which is all investment income (interest, dividends, capital gains) as well as income from passive trades or businesses or rentals of the taxpayer. Gross investment income is reduced by all applicable deductions associated with the income before arriving at net investment income. The new tax does NOT apply to items such as income derived from a trade or business conducted by a taxpayer (though the Hospital Insurance tax will) or distributions from qualified retirement plans, annuities, IRAs or Roth IRAs. It also does not apply to income already excluded under another part of the internal revenue code such as tax-exempt interest on municipal bonds or the excluded gain on the sale of a principal residence. The planning opportunities arising out of this new tax are numerous. Taxpayers should consider planning strategies such as shifting investment income from investment income generating investments to tax-exempt or growth type investments that do not pay out regular investment income, capital gain planning to accelerate expected gains into 2012 to avoid the additional 3.8% tax, deferring deductions to decrease AGI in future years thereby avoiding the imposition of the tax, or by structuring IRA or Roth IRA distributions accordingly to keep MAGI under the threshold limits.
There are many planning opportunities to limit the impact of these two new taxes, but the key word is “limit.” The government is aggressively pursuing additional revenues and these new taxes are just one part of that strategy. Unfortunately there is no escaping these new taxes for many of our clients. Proper planning and being prepared is sometimes all we can do to avoid surprises come tax time. As always, we highly recommend end of year planning to make the necessary adjustments or preparations BEFORE the tax year ends in order to limit the damage and brace for any substantial tax payments due in the coming April. Contact your LMGW advisor at once if you have questions concerning these new taxes or you wish to conduct any planning.