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| October 01, 2013

The health care reform and income tax changes passed as a part of the Affordable Care Act are beginning to have a significant impact on our lives, both in healthcare and in finances. We thought we would use our little monthly tax update to point out a few of the major changes. We'll focus this month on the tax law changes affecting individuals and next month what can be expected by businesses. Higher Rates - Effective for all of 2013, the top income tax rate for individuals has been raised from 35% to 39.6%. This new rate hits taxable incomes above certain thresholds. The threshold for single filers is $400,000 and for married taxpayers filing jointly it is $450,000. In addition, taxpayers in this category will see the tax rate on long-term capital gains and qualifying dividends go up from 15% to 20%. New Taxes - The new rules include an additional 0.9% Medicare tax on earned income (wages and self-employment income) above $200,000 for single taxpayers and $250,000 for married taxpayers. This additional tax will be withheld from your pay if your wages are $200,000 or more regardless of whether you are married or not. Assuming you have a business loss that would negate this tax, you will have to wait until you file your return to get your money back. Smaller Deductions - One law change that will affect taxpayers in all income categories concerns medical expenses. Only medical expenses exceeding 10% of your Adjusted Gross Income will be allowed as a deduction. In the past, this medical expense deduction floor has always been 7.5%. This will be a significant increase in tax for those who have large medical bills and have traditionally been able to reduce their taxable income accordingly. More New Taxes - The new law also includes a new 3.8% surtax on certain net investment income. The provisions are, of course, confusing, but basically if your income is over $200,000 and includes investment income you should be prepared to pay more. Investment income includes such things as interest, dividends, annuities, royalties and rents. Larger Penalties - When funds are removed from Health Savings Accounts for non-qualified medical expenses, there is a penalty. The Affordable Care Act increases this penalty from 10% of the distribution, to 20%. So, HSA funds used for nonmedical expenses will be subject to regular income tax, plus a 20% penalty. As you can see, we have not listed anything above that decreases anyone's tax burden. Presumably the only good news is most of these provisions hit only very high income individuals. However, they have the potential to hit some of them very hard.