The Supreme Court’s decision to uphold the heath care mandate means that many investors will be penalized with higher taxes in 2013. The degree in which tax rates rise is still up for debate, but we know for sure that they’ll rise at least 3.8%.
The 3.8% investment income surtax
In order for the health care mandate to work, in which 30 million Americans who are uninsured will be able to receive health care, everyone else will be taxed. Some taxpayers will face a 3.8% investment flat tax if their adjusted gross income exceeds $200,000 ($250,000 for joint filers). For instance, an investor with $200,000 in wages and $25,000 in investment income either through capital gains (including home sales in excess of the exclusion), interest, rent, royalties or dividends, will be subject to a 3.8% tax on the $25,000, if they are a single filer.
How are high income earners going to be impacted?
The 1.45% medicare tax which has always been a flat tax and withheld from employee paychecks, will now become progressive. Taxpayers earning over $200,000 in wages or self employment income ($250,000 for joint filers) will now face a medicare tax of 2.35% as opposed to the 1.45% everyone else pays. What’s more, unlike social security taxes, medicare taxes are not deductible for the self-employed.
Are any investments excluded from the investment tax?
Yes, and this is very important. While guidance hasn’t been formally issued by the IRS, we believe the following investments will be excluded from the tax: municipal bond interest, distributions in retirement accounts (401k, IRA, Roth IRA), social security income, life insurance proceeds, and business income reported on Schedule C of form 1040. Investors should take special note of these investment vehicles to shelter themselves from the surtax.
Will large deductions help me avoid the surtax?
Since investors and high income earners are taxed based on their adjusted gross income, large mortgage expenses and other itemized deductions will serve no purpose in sheltering the 3.8% investment income tax.
Are there any other taxes that may rise in 2013?
In addition to the new 3.8% investment income surtax, tax rates for long-term capital gains and dividends could rise to 23.8% and 43.4%, respectively. Although we believe that lawmakers will at least temporarily extend the Bush tax cuts, there is still a strong possibility of 43.4% long-term dividend tax rate within the next two years. Time will tell how severe the tax increase will be, but investors should be prepared for at least moderate increases.
More Questions? Ask your tax questions or find a tax professional online.
Related Articles
->What the Supreme Court’s Healthcare Ruling Means For Businesses
->Why You Need Both a 401(K) And a Roth IRA
->The Wealthy Should Prepare For The Expiring Gift Tax Exemption
->The Best Retirement Plans for the Self Employed
