There is a lot being written about the historic Supreme Court ruling regarding Obama Care. However, there has not been much said about the tax provisions of the Health Care Bill. Obviously, with this decision the tax provisions remain on track.
I though this might be a great time to refresh on the tax aspects of the Health Care Act. You can see a detailed overviewof these items by clicking here.
SELECTED PROVISIONS FIRST EFFECTIVE IN 2013
- Additional .9% Medicare Surtax On Earned Income Of Higher-Income Taxpayers.
Payroll taxes imposed on your W-2 earnings include both a Social Security tax and a separate Medicare tax. Under current law, the overall Medicare tax rate is 2.9% (1.45% imposed on the employee and an additional 1.45% imposed on the employer). If you are self employed, you must pay the entire 2.9% Medicare tax on your earned income. However, as a self-employed taxpayer, you are allowed to deduct one-half (1.45%) of your Medicare tax as an above-the-line deduction. Although the Health Care Act does not increase your Social Security taxes, it does increase the Medicare taxes for higher-income taxpayers. Generally, effective for wages and self-employed earnings received after 2012, the Health Care Act imposes an additional .9% Medicare Surtax. The surtax applies to the amount by which the sum of your W-2 wages and your self-employed earnings exceeds $250,000 if you are married filing a joint return (exceeds $200,000 if you are single, $125,000 if you are married filing separately).
Note! For married individuals filing a joint return, the W-2 earnings and the self-employed earnings of both husband and wife are aggregated in determining if the earnings exceed the $250,000 threshold.
- New 3.8% Medicare Surtax On Investment Income.
Since the inception of the Medicare program, the Medicare tax has only been imposed on an employee’s wages and a self-employed individual’s earned income. Starting in 2013, a new 3.8% Medicare Surtax will be imposed on all or a portion of the net investment income (e.g., interest, dividends, annuities, royalties, rents, and capital gains) of certain higher-income individuals. The tax will apply to married individuals filing jointly with modified adjusted gross income (MAGI) exceeding $250,000 (exceeding $200,000 if single, $125,000 if married filing separately). Trusts and estates that have net investment income in excess of certain threshold amounts will also be required to pay the 3.8% Medicare Surtax, unless the income is timely distributed to beneficiaries. However, if the income is timely distributed, the beneficiaries of the trust or estate may be subject to the Medicare Surtax.
What Is Included In Net Investment Income? Generally, net investment income includes (net of allocable deductions) interest, dividends, annuities, royalties, rents, gain from the sale of property (e.g., capital gains), and operating income from a business that trades in financial instruments or commodities. It also includes operating income from any other business which is a passive activity (unless the operating income constitutes self-employment income subject to the 2.9% Medicare tax on earned income). For this purpose, a passive activity is any business activity (other than an activity conducted through a C corporation) which is subject to the passive loss limitation rules because the owner does not materially participate in the business. For example, you are deemed to materially participate in a business and, therefore, the business is not passive if you spend more than 500 hours during the year working in the business.
Is Any Investment Income Exempt From The Surtax? Yes. For purposes of the 3.8% Medicare Surtax on investment income, investment income does not include: tax-exempt bond interest; gain on the sale of a principal residence otherwise excluded from income under the home-sale exclusion provisions; or distributions from qualified plans, IRAs, 403(b) annuities, etc.
Planning Alert! Taxable distributions from qualified plans, traditional IRAs, etc., will increase your MAGI which could, in turn, push you over the $250,000 (joint return) or $200,000 (single return) thresholds, subjecting your net investment income to the 3.8% Medicare Surtax.
SELECTED PROVISIONS FIRST EFFECTIVE IN 2014
- Penalty For Failing To Carry Health Insurance.
Beginning in 2014, the Health Care Act provides a penalty for individuals who do not have minimum essential health coverage. The penalty will be paid with an individual’s income tax return. Certain individuals may be granted an exemption from this penalty, such as: individuals having financial hardship or religious objections; American Indians; those without coverage for less than three months; aliens not lawfully present in the U.S.; incarcerated individuals; those for whom the lowest cost plan option exceeds 8% of household income; individuals with incomes below the tax filing threshold; and individuals residing outside of the U.S.
Tax Tip. Starting in 2014, the Health Care Act also provides for a refundable health insurance premium assistance credit to encourage low and middle income individuals to purchase health insurance.
- New Penalty For Larger Employers That Fail To Provide Adequate Employee Health Coverage.
The Health Care Act, starting in 2014, will generally require certain larger employers to either offer and contribute to their employees’ qualified health insurance coverage, or pay a penalty. This penalty will generally not apply to any employer that employed on average less than 50 full time employees during the preceding calendar year.
Keep your eye on future blog posts for more detailed information on these new tax provisions, how they fit into the year end tax expiration of the Bush Tax Cuts and planning ideas. If you have any questions regarding these tax provisions or theimpact of theHealthCare Act