Recent Developments

A bevy of new tax and related changes has been enacted as part of the 2010 Health Care Act (PL 111-148, 3/23/2010 ) and the 2010 Reconciliation Act. Here’s a couple:


Currently, wages are subject to a 2.9% Medicare payroll tax. Workers and employers each pay ½, or 1.45%. If you’re self-employed you pay it all but get an income tax write-off for ½. This Medicare tax is assessed on all earnings or wages without a cap. These taxes fund the Medicare hospital insurance trust fund which pays hospital bills for those 65+ or disabled. Starting in 2013 a .9% Medicare tax will be imposed on wages and self-employment income over $200,000 for singles and $250,000 for married couples. That makes the marginal tax rate 2.35% Self-employed persons will face a 3.8% on earnings over the above amounts. Look for more changes like this, a few percent here, a few percent there instead of just the rate increases needed to raise revenues. The result will make tax planning and preparing projections increasingly complex.


Only wages and earnings are subject to the Medicare tax above, but starting in 2013 the 3.8% Medicare tax will apply to net investment income if your adjusted gross income (AGI) is over $200,000 single ($250,000 joint) threshold amounts. These amounts are not supposed to be indexed so inflation will erode these overtime. Net investment income includes interest, dividends, royalties, rents, gross income from a passive business, and net gain from property sales. You can reduce net investment income by properly allocable deductions. Your advisers may have to allocate their bills by category to help. This tax won’t apply to retirement assets. Roth IRAs are lookin’ better. Earnings on non-IRA investments could be subject to this higher tax, but if used to pay tax on a Roth conversion the earnings will all be inside the tax deferred Roth thereafter.

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