On June 28th, 2012 the U.S. Supreme Court voted to uphold the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA). What does this mean for taxpayers?
Starting with tax years beginning after December 31, 2012 (so January 1st, 2013 for calendar year taxpayers) there are additional taxes that will be levied:
The 0.9% Medicare Tax:
An additional 0.9% Medicare tax on wages and self-employment income for individuals with compensation in excess of $200,000 ($250,000 for married couples filing jointly, $125,000 for married couples filing separately). Employers will be required to withhold the extra 0.9% from an employee’s paycheck if the employee receives wages over $200,000. However, it is possible to get into this tax class without having sufficient withholding to cover the extra tax.
For instance, say I make $150,000 and my spouse also makes $150,000. Since individually we do not make over $200,000, our employers will NOT be withholding this additional tax from our paychecks. We will have to pay the additional Medicare tax with our 2013 tax returns. These amounts would increase our tax bill by $450.
The 3.8% Medicare Tax:
This change is a little more complicated. This tax will be placed on the lesser of Net Investment Income or Modified AGI (adjusted gross income). First, what is investment income? This can include many different things like interest, dividends, capital gains, annuities, and royalties. Rents can also be included as unearned income, but the rules for determining if rents are earned or unearned are beyond the scope of this article. Specifically excluded from Net Investment income are self-employment income, income from an active trade or business, IRA or qualified plan distributions and income from charitable remainder trusts.
The threshold amount for Modified AGI is $250,000 (Married filing jointly), $125,000 (Married filing separately) or $200,000 (all other taxpayers).
For example, say my spouse and I are filing together and have $300,000 in salary income and $100,000 of Net Investment Income. The amount subject to the 3.8% surtax is the less of our Net Investment Income ($100,000) or the amount of our Modified AGI (salary + investment income) over the threshold ($400,000-$250,000 = $150,000). Because Net Investment Income is lower than the amount of the threshold ($100,000 versus $150,000), the amount subject to the tax would be $100,000 and the surtax payable is $3,800.
For more information, or a detailed analysis of how these laws will impact you, please contact our office.