There are many important areas to the new healthcare law, including the shared responsibility tax that will affect some taxpayers starting in 2013.
The first tax is a 3.8 percent Medicare surtax assessed on investment income of individuals with adjusted gross incomes greater than $200,000 if filing as single for taxes or $250,000 if filing married jointly. Many commentators mistakenly make it appear as if this tax will affect anyone above these income thresholds. However, there is a second calculation involved: The tax is calculated on the lesser of either those set income levels or net investment income.
Net investment income can be vaguely summarized as income from interest, dividends, annuities and passive activities, such as rental properties and taxable gains from the sale of assets. The main items that are not considered are distributions from IRAs and other retirement plans such as 401(k)s and income from municipal bonds.
The second tax is an additional .9 percent Medicare tax related to earned income, whether as an employee or a self-employed individual. The tax applies to any earnings of a single filer greater than $200,000 or $250,000 for married jointly taxpayers. The same thresholds apply for both taxes, but one is on gross income and one is on earned income.
As an example to demonstrate both taxes, assume we are discussing a married couple filing a joint tax return with combined wages of $260,000 and net investment income of $15,000. For simplicity purposes, the combined gross income is $275,000. How do the taxes apply? The net investment income tax is calculated as the lesser of either the amount of gross income – $275,000, which exceeds the $250,000 threshold by $25,000 – or the amount of investment income of $15,000. In this case, the tax applies to $15,000 and there would be an additional 3.8 percent tax on $15,000 or $570. The second tax would apply to the amount of earned income in excess of $250,000. In this case, the earned income is $260,000, therefore the .9 percent tax applies to $10,000 for an additional tax of $90.
As you can see, you must do some calculations to see even if they affect the higher income filers. This is not an attempt to define all of the terms used in the tax law for these particular taxes but a broad overview of how they may apply to taxpayers. As with any area of the tax law, and specifically one as complicated as this, consult a qualified tax adviser versed in the intricacies of tax law.
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Neil A. Brown is a CPA and CFP with Burkett Financial Services in West Columbia. Contact him at www.uscneil.com or (803) 200-2272.