Personal Finance & New Wealth Taxes Buried Within The Health Care Reform Act

Both businesses and individual taxpayers need to be aware of the added taxes buried within the Health Care Reform Act passed by Congress in March, 2010. It is crucial to obtain an understanding of the changes that are going into effect in the near future, including increased taxes on personal wealth. In two distinct income taxes, individuals earning over $250,000 jointly, or $200,000 single are likely to see an increase to taxable income.

Starting in 2013, couples earning over $250,000 ($200,000 for singles) will be taxed an extra .9% of wages – creating a progressive tax on wages. Also in 2013, investment income will now be taxed at 3.8% for those same couples earning over $250,000 ($200,000 for singles). The investment income tax is also applicable to investment income over $12,000 that is not distributed to beneficiaries in the case of trusts and estates. Tax rates are applied to the taxpayer’s modified adjusted gross income above these thresholds.

Essentially, these increases are actually an increase in Medicare tax. Currently, Medicare payroll tax is composed of the current 1.45% traditionally paid by the employee, and another 1.45% matched by the employer. In 2013, taxpayers will have to apply an extra 0.9% to their earned wages as well.

Investment income includes interest, dividends, rental income, royalty income, capital gains (including the sale of a home), and insurance annuity income. Retirement accounts such as IRA distributions, pensions and Social Security, municipal bond interest, veteran’s benefits and income from partnership or S corporation earnings are excluded from investment income. While pension and social security income are not considered investment income, these two sources of income increase adjusted gross income. The tax consequences could greatly affect personal finances after consideration of the changes.

Examples of result of the new tax:

• In 2013, a couple earning investment income of $500,000 will pay taxes of $5,875 – which is $2,250 higher than the amount they would pay today ($3,625).
• If that same couple earned investment income of $1,000,000 in 2013, their tax liability would increase to $17,625 – a jump from $10,875 today.
• A single taxpayer earning investment income of $500,000 will see an increased tax liability of $2,700, and $7,200 if he or she earns $1,000,000.

With many factors for the “wealthy” to consider, perhaps most important is the impact of the tax without looking at numbers. The 3.8% tax will apply regardless of itemized deductions since the tax will be applied directly to investment income, not to taxable income as a whole. For example, a taxpayer reporting a significant loss might not be liable for tax today, but if it happens in 2013, he or she will be liable for 3.8% tax on their investment income, regardless of the overall loss.

There are so many factors for taxpayers to consider in tax planning and since the IRS has not yet issued guidance, please contact your MarcumRachlin Tax Professional indicated below to see how these changes may affect you.