Medicare tax likely to expand in 2013

Related Attorney(s): David S. De JongMark W. SchweighoferEric J. RollingerDavid B. Torchinsky

Media Type: Alert

With the Republican party failing to gain a complete sweep of the White House and both houses of Congress in the recent election, it is now reasonably certain that President Obama’s healthcare reform legislation enacted in 2010 will not be repealed and remaining provisions will come into effect as scheduled. Earlier this year, the U.S. Supreme Court determined that the Act was constitutional.

While the provision expanding family health insurance coverage until a child reaches age 27 has already taken effect and the “shared responsibility penalties” for businesses and individuals aren’t in place until 2014, a 0.9 percent hike in portions of the Medicare tax is less than two months away for both employees and self-employed individuals with higher incomes. Not applicable on the employer portion of Medicare, the increase affects unmarried individuals to the extent of wage and SE income over $200,000 and married couples to the extent of combined wage and SE income over $250,000.

Additionally, filers with higher incomes will be paying the Medicare tax at the 3.8 percent rate on certain investment income. The tax will be applied to the lesser of “net investment income” or modified adjusted gross income over a threshold amount of $200,000 for unmarried individuals and $250,000 for married couples. Retirement distributions and tax exempt interest are specifically excluded from the definition of net investment income. However, the definition includes other interest, taxable dividends, rents, royalties and capital gains. It also includes flow through income from S corporations, partnerships and LLCs which are passive activities to the taxpayer. Flow through income from S corporations in which the taxpayer materially participates will escape Medicare taxation, falling outside of both this provision and the Medicare tax on self-employment income

If the Medicare tax on investment income is combined with a possible 5 percent increase in the dividend and general capital gains rate, this could mean a potential tax increase of 8.8 percent on these types of income for some individuals. Fortunately, in some situations, proper planning may alleviate this additional tax. For example, if you sold investment property or business interests this year with payment over time, it may be advantageous to elect out of installment sale treatment for tax purposes and pay the full tax with your 2012 tax return.

The healthcare Act contains many other provisions including one reducing elective deferrals for medical reimbursements under a cafeteria plan to $2,500 effective 2013. If you would like to meet with one of our tax attorneys to discuss how these changes in the tax law affect you, or if you need assistance with any other federal or state tax matter, please call us at 301-340-2020.

Tax Law at Stein Sperling

Stein Sperling’s tax law attorneys counsel clients on the intricacies of business and personal taxes in order to minimize tax liabilities. Each of our tax law attorneys holds either a Master of Laws degree in Taxation or is a Certified Public Accountant (CPA) or both. We participate in programs that allow us to stay on top of the rapidly changing world of tax laws, regulations, cases and rulings. We decode the tax talk and carefully guide our clients, helping them understand the big picture tax implications and tailoring strategies that benefit their short- and long-term objectives.

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