Starting in 2013, the Patient Protection Affordable Care Act (PPACA) will enact numerous tax increases. The PPACA includes, at least, 20 new taxes. It is important to understand how these new taxes will affect you and to plan ahead, especially for high net worth individuals.
Medicare tax rates are increasing from 1.45% to 2.35% as of 2013. That 0.9% increase applies to income above the $200,000 threshold for single individuals and income above the $250,000 threshold for married couples filing jointly. It is important to realize that if you are self-employed you will be paying both sides of the tax so your effective tax rate will be 3.8% for income above the threshold.
The health insurance mandate comes into effect in 2014. Individuals without health insurance can purchase a policy or pay a penalty equal to a certain percentage of their adjusted gross income (AGI).
The ACA also increases threshold for the deduction of itemized medical expenses. The deduction threshold will go from 7.5% to 10% in 2013, which will reduce the deductibility of medical expenses.
The ACA creates a new 3.8% surtax on “other investment income” for incomes above the $200,000 (single individuals) or $250,000 thresholds (married filing jointly). Other investment income includes gross interest, capital gains, dividends, royalties, net rents, passive income, and home sales after deductions. Other investment income does NOT include municipal bond interest, life insurance, IRAs, or other retirement plans. The tax will be paid on the LESSER of AGI that exceeds threshold or net investment income. This surtax begins in 2013.
The ACA also includes a sales tax on individual / employer, Medicare and Medicaid beneficiaries who currently have private insurance (2013). Cadillac plans or plans with high premiums and low deductibles will also be taxed (2014).
What are some ways to plan for these new taxes? First, reduce your investment income in 2013; if possible sell appreciated assets in 2012. One possibility is to convert your IRA to a Roth IRA to reduce your AGI (adjusted gross income). While you may pay income taxes now, your AGI will be significantly reduced for the future. Think about increasing contributions to qualified retirement plans to reduce your AGI.
Contact Kolinsky Wealth Management to see how these new regulations affect you. One of our financial advisors will help you plan for and help mitigate the higher taxes.