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As of now, we still have the Affordable Care Act (AKA
Obamacare). The Supreme Court upheld it, and most likely it is going to be a
long-term reality. Let’s get used to it.
Now that we are passed the politics, we must look deeper.
Healthcare does not pay for itself, so buried deep within the legislation (here,
to be exact, or more specifically, H. R. 4872—33 Chapter 2A, Sec. 1411) is a
bump in the taxes for earned income, and a 3.8% Medicare contribution tax on
unearned income.
What it means:
- Starting in 2013, high-income
individuals will pay another 0.9 percentage points on earned income over
$200,000 ($250,000 if married). The current rate is 2.9%.
- Starting in 2012, those
same individuals, estates, and trusts will pay a 3.8% Medicare contribution
tax on UNearned income above the same threshold amounts.
Analysis:
You can get stuck with both, or one or the other. If you’re
an individual taxpayer, the tax is 3.8 % of the lesser of the excess of
modified adjusted gross income over the $200k/$250k threshold amounts, or net
investment income.
For estates and trusts, the tax is 3.8% of the lesser of
excess of adjusted gross income over the highest income tax bracket for an
estate/trust or the undistributed net investment income.
Confusing? It is. Just know if you make over $200k or $250k
jointly, and have investments, you’re gonna pay more than you would have this
year.
This may seem like it will only affect the wealthy, but it
is much more broadly reaching than that. Say you normally make $100k, and your
spouse $100k. Good, right? What if you sell your house? What if you sell some stocks, or have a good year with
rental properties?
The UNearned (capitalized for hyperbole) income tax hits on
more things than you think. The tax covers nonbusiness income from dividends, royalties,
rents, and interest, except
municipal-bond interest; short- and long-term capital gains (think stocks,
sales of land, etc.); the taxable portion of annuity payments; income from the
sale of a principal home above the $250,000/$500,000 exclusion; a net gain from
the sale of a second home; and passive income from real estate and investments
in which a taxpayer doesn't materially participate, such as a partnership.
That is a really
comprehensive list.
Examples:
Let’s try some
examples.
- Example: A married couple filing jointly has $400k of
adjusted gross income--$240k of wages plus $160k of investment income
composed of interest, dividends and net gains from the sale of real estate.
Because they have $150k of investment income above the $250k threshold,
they would owe an extra 3.8% of that amount, or $5,700, in tax.
- Example:
A trust with a $100k of undistributed net investment income would pay the
3.8 percent surtax on $88k as this amount that exceeds the threshold
amount of $12k, yielding $3,344 in surtax.
- Example:
A trust has $50k in net investment income and needs to make $60k in
distributions. The trust has two beneficiaries, poor guy and rich guy. Rich
guy will get tagged with the extra tax, poor guy will not. One way to beat
the system is distribute more out to poor guy, assuming both parties
agree, and prevent the tax hit.
Take away:
We are in a deficit. We have a multitude of government
entitlement programs, welfare systems, new healthcare initiatives, and are
paying for wars on multiple fronts in the wake of an extended global recession,
the likes not seen since the big one. Taxes are going to go up, they just have
to unless something crazy happens. This is one of the taxes that will go up. It
is a tough one, but it does not mean you cannot minimize the impact it has on
your bottom line.
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