Affordable Care Act: Additional Taxes – Effective 2013
by Lee Bowman
In addition to the healthcare mandates that become effective in 2013, there are two new taxes within the Act that begin in 2013 to help offset the costs of the healthcare act. They are the 3.8% Net Investment Income Tax and the .9% Medicare Tax on wages and self-employment income.
Net Investment Income Tax: The 3.8% net investment income tax will only affect taxpayers when their modified adjusted gross income (AGI) exceeds $250,000 for married filing jointly taxpayers and surviving spouses; $200,000 for single taxpayers and head of household filers, and $125,000 for married taxpayers filing separately. If you claim the foreign earned income exclusion, the excluded amount will be added back to your AGI to arrive at your modified adjusted gross income.
Net investment income includes interest, dividends, royalties, annuities, rents and net gains from property sales. Wages and net income from an active trade or business are not included in net investment income. Tax-exempt bond interest is excluded from the 3.8% net investment income tax. If your modified AGI exceeds the above amounts, you will be subject to the 3.8% tax which will be applied to the lesser of 1) your net investment income for the year or 2) the excess of your modified AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.
When selling your primary residence, you may be able to exclude up to $250,000 of net gain or up to $500,000 for MFJ taxpayers. This excluded gain will not be taxed. Gain in excess of those exclusions may be taxed. Distributions from Roth IRAs are excluded, however distributions from regular IRAs will be included in your modified AGI but is not subject to the 3.8% net investment tax, ut could cause other income to be subject to the 3.8% tax. When making estimated income tax payments, taxpayers must include the 3.8% net investment income tax in their estimated payments in order to avoid a penalty.
Please note that the modified AGI amounts listed above will NOT be adjusted for inflation.
0.9% Tax on Wage and Self-employment Income: The 0.9% additional Medicare Tax applies only to employees and self-employed individuals, not employers. The tax applies to wages in excess of $250,000 for MFJ taxpayers; $125,000 for MFS, and $200,000 for all other filers.
Once an employee’s wages exceed $200,000, employers must withhold the additional 0.9% tax from their wages. This may not be enough if the employee has another job, or if his spouse has wage or self-employment income. The taxpayer may file a new Form W-4 with his employer to have additional taxes withheld.
Self-employed taxpayers will pay the additional 0.9% tax on their self-employment income using the same wage brackets listed above. The 0.9% tax is in addition to the 2.9% Medicare tax on self-employment income; however, the taxpayer will not be allowed to deduct 50% of this additional Medicare tax on the front page of their return.
Because these new taxes are not inflation adjusted, more taxpayers will pay these taxes in the future. The current Federal tax schedules can be found here. 2013 NC Income tax rate is 5.7% on all NC taxable income.
Langdon & Company LLP is full of knowledgeable tax staff that would be happy to assist you with your tax needs. Please contact our office to get more information.
Lee Bowman ([email protected]) is a Manager in our Accounting Services practice at Langdon & Company LLP. She has over 25 years of experience in taxation and also specializes in multi-dimensional corporate accounting across various states.
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