Last week the U.S. Supreme Court upheld the constitutionality of President Obama’s healthcare reform legislation which means we’ll see a couple new taxes take effect in 2013. Overall, I think the impact of these taxes is small, though we’ll want to manage them as best we can.
The first tax is an increase of the Medicare tax .9% on earned income above $200,000 for individuals or $250,000 for married couples. As an example, let’s say one spouse earns $200,000 and the other earns $150,000 for total earnings of $350,000. The couple will owe $900.
The second tax is on investment income and, again, targets high-earners. It is a 3.8% tax on investment income above the $200,000/$250,000 threshold. It includes capital gains, royalties, interest, rents, and other nonwage income. It doesn’t include life insurance proceeds, IRA distributions, pensions, or Social Security income. If, for example, an individual taxpayer earns $210,000 and has $10,000 in long term capital gains, the taxpayer will owe $380 of additional tax.
Details and final guidance from the Internal Revenue Service won’t be available until later this year but it’s important to note that there are two other tax changes happening that will have a far bigger impact. The first is the scheduled expiration of the Bush tax cuts. If the cuts expire, everyone’s taxes will increase, not just those of high-earners. Dividends will be taxed at ordinary income rates; long term capital gains will be taxed at 20%. The second is the scheduled expiration of the estate tax cuts. Unless new legislation is enacted, in 2013 estates above $1M will be taxed at 55%. Ouch!
On the bright side, there’s a lot of good stuff in the healthcare reform. Keeping adult dependents on family policies up to age 26 already is helping millions of parents sleep better at night. Beginning 2014, insurers can no longer drop an individual if he or she becomes sick, can’t refuse coverage for pre-existing conditions, and can’t set annual or lifetime limits on care. And as states set up insurance exchanges we may finally have an affordable health care option for early retirees.
As the year progresses, we’ll work together to take the appropriate steps to minimize your tax obligation wherever we can. If you have specific questions on these new taxes please don’t hesitate to email or call.