In August of 2010 I posted an article about the various changes that would be coming as a result of the Patient Protection and Affordable Care Act. A number of those changes become effective on January 1, 2013 and may necessitate some tax planning so I thought it was a good time to remind you what's ahead.
Individuals will pay an additional 0.9% Medicare tax on wages and self-employment income on amounts earned above $250,000 for a couple, $125,000 for those who are married but filing separately and $200,000 for all others. Employers will be required to
withhold at the 0.9% rate on an employee's salary in excess of $200,000 without regard to a spouse's income. Any underpayment or overpayment will be dealt with on the income tax return.
Two examples - One spouse makes $225,000, the other spouse doesn't work, combined income is less than $250,000 on their joint return. The 0.9% in additional MediCare taxes that have been withheld because the working spouse made more than $200,000 will be refunded when the couple's 2013 tax return is filed in 2014. Second example - Each spouse makes $150,000, neither employer withholds the additional 0.9% MedidCare tax, combined income is more than $250,000 on their joint return. The couple is obligated to pay the additional 0.9% MediCare tax on $50,000 - the amount their income exceeds the $250,000 threshold - as part of their tax bill on April 15, 2014.
Under current law, MediCare taxes are assessed only on earned income. Beginning in 2013 a MediCare tax will also be imposed on the investment income of individuals, estates and trust. For individuals the tax will be 3.8% of net investment income or the excess of modified adjusted gross income over the threshold amounts, whichever is less. For estates and trusts, the additional tax will be 3.8% of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest estate and trust income tax bracket begins, whichever is less. Investment income is defined as income from dividends, interest, annuities, royalties, rents and gains from the sale of property such as stocks. Investment income does not include tax-exempt bond interest, distributions from retirement plans and IRAs, veterans' benefits or gain from the sale of a principal residence.
The threshold for claiming medical expenses as an itemized deduction will increase from 7.5% of adjusted gross income to 10% of adjusted gross income. There is a temporary reprieve for seniors - for tax years 2013 through 2016 the 7.5% floor continues to apply for individuals who reach the age of 65 before the end of the tax year. For married couples filing jointly, only one spouse needs to be 65 in order for the lower threshold to apply.
The amount that can be contributed to a cafeteria plan will be reduced to $2500 and will be adjusted for inflation in subsequent years.
Individuals will pay an additional 0.9% Medicare tax on wages and self-employment income on amounts earned above $250,000 for a couple, $125,000 for those who are married but filing separately and $200,000 for all others. Employers will be required to
withhold at the 0.9% rate on an employee's salary in excess of $200,000 without regard to a spouse's income. Any underpayment or overpayment will be dealt with on the income tax return.
Two examples - One spouse makes $225,000, the other spouse doesn't work, combined income is less than $250,000 on their joint return. The 0.9% in additional MediCare taxes that have been withheld because the working spouse made more than $200,000 will be refunded when the couple's 2013 tax return is filed in 2014. Second example - Each spouse makes $150,000, neither employer withholds the additional 0.9% MedidCare tax, combined income is more than $250,000 on their joint return. The couple is obligated to pay the additional 0.9% MediCare tax on $50,000 - the amount their income exceeds the $250,000 threshold - as part of their tax bill on April 15, 2014.
Under current law, MediCare taxes are assessed only on earned income. Beginning in 2013 a MediCare tax will also be imposed on the investment income of individuals, estates and trust. For individuals the tax will be 3.8% of net investment income or the excess of modified adjusted gross income over the threshold amounts, whichever is less. For estates and trusts, the additional tax will be 3.8% of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest estate and trust income tax bracket begins, whichever is less. Investment income is defined as income from dividends, interest, annuities, royalties, rents and gains from the sale of property such as stocks. Investment income does not include tax-exempt bond interest, distributions from retirement plans and IRAs, veterans' benefits or gain from the sale of a principal residence.
The threshold for claiming medical expenses as an itemized deduction will increase from 7.5% of adjusted gross income to 10% of adjusted gross income. There is a temporary reprieve for seniors - for tax years 2013 through 2016 the 7.5% floor continues to apply for individuals who reach the age of 65 before the end of the tax year. For married couples filing jointly, only one spouse needs to be 65 in order for the lower threshold to apply.
The amount that can be contributed to a cafeteria plan will be reduced to $2500 and will be adjusted for inflation in subsequent years.
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