The First Obamacare Tax Increase

Beginning January 2013, the additional Medicare tax becomes effective. This tax will imposed in accordance with the much maligned Patient Protection and Affordable Care Act. There are two aspects of this tax that will be of particular interest.First of all, the law imposes and additional .9 percent tax on wages and self-employment income exceeding $200,000 for single individuals and $250,000 for married individuals filing joint returns. Employers will be obligated to withhold the additional tax only on wages over $200,000 and will not be responsible for determining whether an employee’s combined income with his or her spouse made them subject to the tax.The second aspect of the new tax will probably be more widely felt. This is the addition of a new, previously nonexistent, tax called the “unearned income Medicare contribution tax.” This is a tax of 3.8% imposed on the lesser of net investment income or modified adjusted gross income exceeding $200,000 for single filers and $250,000 for married filing joint returns.This is a very large step toward additional taxes. For the first time in history, a “payroll tax” will be imposed on unearned income. The categories of income which will now be taxed for income and payroll tax purposes includes interest, dividends, capital gains, annuities, royalties, rents and pass-through income from passive entities such as S-corporations and partnerships.We can all hope action is taken soon to stop the imposition of this personally punitive and economically damaging tax. However, in the meantime, taxpayers should consider how this might affect their decisions about current investments with large gains, IRA’s, property dispositions, estate settlements and a host of other gains. If you think you might be subject to this tax, we would be happy for you to come in for a visit.