Resources

News

News Blog

Patient Protection and Affordable Care Act

Posted 12:00 AM by

The U.S. Supreme Court recently announced its decision on the constitutionality of the Patient Protection and Affordable Care Act of 2010. The court ruled that a substantial portion of the act was constitutional, including the additional Medicare taxes to be imposed on certain individuals effective Jan. 1, 2013. The following is a summary of the new Medicare tax provisions as of Jan. 1, 2013.

Unearned Income Medicare Tax 

Effective Jan. 1, 2013, certain individuals, trusts and estates will be required to pay a 3.8 percent Medicare tax on their share of net investment income. Net investment income includes interest, dividends, royalties, annuities, rents, passive trade or business activities, and capital gains reduced by any expenses related to the investment income.

For individuals, the additional Medicare tax may be imposed against you if your modified adjusted gross income exceeds of the following income amounts:

  1. Married Filing Joint and Surviving Spouses — $250,000
  2. Married Filing Separate — $125,000
  3. Single and Head of Household — $200,000

The tax will apply to the lessor of the net investment income or total modified adjusted gross income in excess of the threshold amounts listed above.

Income from nonpassive trade or business activities will not be considered investment income for purposes of the Unearned Income Medicare Tax. For example, real estate professionals would have their real estate-related income exempt from the net investment income definition.

The unearned income of dependent children who are taxed at their parents’ income tax rate will not be subject to the tax unless such child’s income exceeds $200,000.

High Income Medicare Tax

Effective Jan. 1, 2013, individuals will be required to pay a 0.9 percent Medicare tax on wages and self-employment income in excess of the following amounts:

  1. Married Filing Joint and Surviving Spouses — $250,000
  2. Married Filing Separate — $125,000
  3. Single and Head of Household — $200,000

The tax will apply to the amount of wages and self-employment income in excess of the threshold amounts listed above. Furthermore, the additional 0.9 percent Medicare tax on a joint return is determined by the combined wages and self-employment income of both taxpayers. Employers will be responsible for withholding the additional 0.9 percent only for those employees who earn wages in excess of $200,000 from such employer.

If you are filing a married filing joint tax return with combined wages and self-employment income in excess of $250,000, you may not be able to rely only on your withholdings to cover the additional 0.9 Medicare tax, and you may need to account for all or a part of the additional tax in determining your responsibility to make quarterly estimated tax payments.

Income from partnerships, in which the partner’s share of income is subject to self-employment tax, is included in the calculation of the taxpayer’s earned income subject to the High Income Medicare tax. However, flow-through earnings from S corporations are not subject to the High Income Medicare tax.

Planning Opportunities

  1. Unearned Income Medicare Tax
    • Consider recognizing investment income, specifically capital gains, in 2012 instead of waiting until 2013. Recognition of capital gains in 2012 may allow you to avoid the 3.8 percent additional tax and have its gain taxed at the lower capital gain rate, which is currently set to increase to 20 percent as of Jan. 1, 2013.
    • Determine if you are passive or active in your investment activities. All passive activities should be reviewed to determine if you can be classified as active. A review of the passive activity rules is vital to determine if you are considered a passive or active investor in the trade or business, specifically the real estate industry.
    • Consider grouping similar activities as one activity and determine if you are considered active in the activity.
    • Consider potential change in investment strategy. Consider investments that result in tax exempt income, tax deferred income or non-dividend paying growth stocks.
    • In 2013 and beyond, consider the utilization of installment sales as a way to defer the recognition of income from property sales. For 2012 installment sale transactions that result in capital gains, consider electing out of the installment sale method and recognize 100 percent of the capital gain as it would be taxed at the lower 15 percent rate and avoid the 3.8 percent additional tax.
       
  2. High Income Medicare Tax
    • Consider recognizing additional wages in 2012 and reducing 2013 wages.
    • If you are a self-employed individual, consider deferring purchases until 2013 in order to reduce the net earnings subject to the additional tax.
    • If you are an S corporation shareholder, consider a reasonable reduction in salary and a reasonable increase in cash distributions.
    • Consider the check the box rules and convert a limited liability company from a partnership to an “S” corporation.

Be advised that these are the current rules and could be subject to change by Congress before the end of the year. In addition, if there is a change in the presidency and/or Congress this November, these rules could be significantly altered or completely repealed by the new president and/or Congress. If there are any questions or specific circumstances for discussion, do not hesitate to contact your KSM advisor.

link
e-mail