Now that the health care law has
been declared constitutional, several significant provisions will become
effective on January 1, 2013
Tax #1: 3.8% Surtax
on Investment Income
This new tax will be levied on
net investment income if modified adjusted gross income is more than the
“threshold amount” based on filing status. For married taxpayers filing
jointly, the threshold amount is $250,000. For married filing separately, it is
$125,000. For single taxpayers, the threshold is $200,000. The surtax also
applies to trusts and estates if the net investment income is more than about
$12,000 and is not paid out to the heirs/beneficiaries.
to expire on December 31, adding this surtax will increase the tax rate on
long-term capital gains and dividends from 15% to 18.8%. If Congress does not
extend the current rates, the top rate on January 1 for capital gains will be
23.8% and the top dividends rate will be a whopping 43.4%!
Determined
Modified adjusted gross income is adjusted gross income (the
last line on page 1 of Form 1040) plus the net foreign income exclusion amount.
Income includes interest, dividends, capital gains, wages, retirement income,
and income from businesses and partnerships. No itemized deductions, which
lower income for income tax purposes, are included for this calculation.
no surtax will be paid, regardless of the amount of investment income.
due on 1) the amount of adjusted gross income over the threshold amount OR 2) net investment income, whichever is less.
Defined
Net investment income is total investment income less
allocable expenses. Investment income includes interest, dividends, capital
gains, annuities, rents, royalties, passive activity income, gain on the sale
of a principal residence above the $250,000/$500,000 exclusion and gain from
the sale of a second home.
active trade and/or business income; distributions from IRAs and other
qualified retirement plans; Social Security income and veterans’ benefits;
income from tax-exempt and tax-deferred vehicles like municipal bonds,
tax-deferred nonqualified annuities, life insurance and nonqualified deferred
compensation; or any income taken into account for self-employment tax
purposes.
Plan Now to Minimize
the Tax
Start now to reduce investment
income and modified adjusted gross income for 2013 and beyond. Consider
shifting investments, converting to a Roth IRA, deferring income, increasing
contributions to tax-deferred plans, installment sales and charitable trusts.
Payroll Tax Increase for Higher Earners
This tax will increase .9%, from 1.45% to 2.35% on wages and
self-employment income above $250,000 for married taxpayers filing jointly and
above $200,000 for single taxpayers.
Device Manufacturing Tax
This 2.3% tax will be levied on the gross sales of medical
device makers, whether or not they make a profit.
Bills Tax
Currently, medical expenses that exceed 7.5% of adjusted
gross income are deductible on Form 1040. On January 1, the threshold will
increase from 7.5% to 10%.
Spending Account Cap
Flexible Spending Accounts are pre-tax accounts that 24
million Americans use to pay for all kinds of family medical expenses,
including tuition for children with special needs. Currently, these accounts
have no federal limit, but beginning January 1 they will have a $2,500 annual
cap.
In addition to planning now to
reduce or avoid the 3.8% surtax in 2013 and beyond, this is an exceptional year
to do estate planning. The federal gift and estate tax exemption is $5.12
million, which allows a married couple to remove as much as $10.24 million from
their estate with no estate tax. Under current law, this exemption is scheduled
to shrink to $1 million in 2013. Other Bush-era tax rates, including income and
capital gain taxes, are set to expire at the end of 2012. With these new taxes
becoming effective in January, 2013 is on track to have the highest tax rates
we have seen in years.
expert advice on all tax-planning issues. Now, more than ever, you need the
assistance of experienced professionals to advise you and help you implement
the best plan for you and your family. If you have questions, contact our bay area estate planning attorneys.
The full text of the Health Care Act is available here,
with the relevant provisions of the surtax beginning at Section 1411 at page
946.
