Understanding the tax implications of the Health Care and Education Reconciliation Act.

With the Supreme Court deciding to uphold what has become widely known as Obamacare, there are some tax implications that may make the Affordable Care Act less affordable for higher net worth individuals and families. Unless Congress repeals the Act, those who are considered by the government to be high-income taxpayers will be paying additional taxes in 2013.

Funding Healthcare Reform
Surprised? You are not alone, as many of our clients were not aware of the new taxes or the fact that the definition of “high-income” was as low as $125,000. Here is information about the new Medicare taxes, along with some advice to potentially minimize your exposure.

Starting in 2013, two Medicare tax changes will apply to individuals with an adjusted gross income of over $200,000, or married taxpayers with an adjusted gross income in excess of $250,000 ($125,000 if filing separately):

  • Medicare payroll tax increase – Qualifying individuals and families will pay an additional 3.8% tax on the lesser of your net investment income, including dividends, interest, and capital gains, or your adjusted gross income over $250K. The current 2.9% tax is split between employer and employee, but the incremental 0.9% will be paid only by the employee.
  • Unearned income Medicare contribution – Qualifying individuals and families will pay an additional 3.8% tax on net investment income, including dividends, interest, and capital gains. The current 15% long term capital gains tax rate effectively increases to 18.8%. If the Bush tax cuts expire, that rate increase to 25%, a 56% jump over 2012.

Start Your 2013 Planning Today
There are several ways to minimize the impact of the Medicare contribution tax. This is a complex problem that may involve your current investments, so start planning now, even if you decide to wait for the fall elections to execute your plans.

  • Consider municipal bonds – This interest is exempt from the Medicare contribution tax, effectively improving returns in comparison against non-exempt investments.
  • Fund your retirement account – Retirement income is also not subject to 3.8% tax. Consider post-tax accounts like Roth IRAs, where you can pay capital gains today at the lower 2012 rates.
  • Take your capital gains now – Assuming the Bush tax cuts also expire, you will play less than half of the capital gains taxes by recognizing the gains in 2012 vs. in 2013. You can always reinvest after you sell.

This Is Complicated!
As you would expect, the details behind the taxes, income calculations, and tax exclusions are complex. If you would like to learn more about how to calculate and minimize the Healthcare Reform tax implications, please give us a call to schedule an appointment.