President Obama signed the Patient Protection and Affordable Care Act of 2010 (P.O. 111-148) on March 23. Congress has passed the Health Care and Education Reconciliation Act of 2010 (H.R. 4872 on March 25, completing the package.
The most significant tax increase for high-income taxpayers, for Medicare taxes, will become effective in 2013. There will be an additional 0.9% Medicare tax on earned income exceeding $200,000 for single persons and $250,000 for married persons filing joint returns. In addition, at 3.8% Medicare tax will apply to certain UNEARNED income.
The tax on unearned income will apply to the lesser of (1) the excess of “modified adjusted gross income” over $200,000 for singles, $250,000 for married filing joint returns, $125,000 for married filing separate returns, or (2) net investment income.
Modified adjusted gross income is adjusted gross income increased by the amount excluded for foreign earned income (less deductions attributable to that income).
The $200,000, $250,000 and $125,000 thresholds are not indexed for inflation.
New investment income includes interest, dividends, royalties, rents, gain from disposing property from a passive activity and income earned from a trade or business that is a passive activity (not otherwise subject to self-employment tax.) Distributions from qualified retirement plans, including 401(k)s and IRAs, won’t be subject to the tax, but distributions from nonqualified deferred compensation plans might be. (We’ll probably see litigation on the deferred compensation issue.)
The painful thing about these taxes is they apply to income without reduction for itemized deductions, standard deductions or personal exemptions.
This change is a reason to think about ACCELERATING INCOME to years before it becomes effective and shifting appreciation to qualified retirement plans, IRAs and Roth accounts. (And pray they don’t become a target for the tax in the future!)
IRS Circular 230 Disclosure:
As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.