Thursday, April 22, 2010

Congress to Increase Taxes on Individuals

With the passage of the new Patient Protection and Affordable Care Act, starting in 2013 the new law provides for 3.8% tax on “Net Investment Income” to help pay for nearly $1 Trillion in spending under the health care legislation. This has now been labeled the“Medicare Tax”.

For individuals, this 3.8% additional tax is imposed on the lesser of:
(i) Net Investment Income; or,
(ii) Modified adjusted gross income exceeding $250,000 for married couples filing jointly or $200,000 for single tax payers.

This 3.8% tax increase also implies to Net Investment Income of trusts.

Net Investment Income encompasses interest, dividends, capital gains (other than income from an active trader business not primarily engaged in investment trading activity), rent and royalties as reduced for applicable specific deductions.

It appears that tax exempt interest from municipal bonds and similar investments will not be subject to this tax. Also exempt are distributions from IRAs and qualified retirements plans such as 401(k) and profit sharing plans.

With the ending of the Bush tax cuts which are scheduled to expire at the end of 2010 long term capital gains rates will increase next year from 15% to 20% and dividend rates will again be taxed as ordinary income starting next year. With the corresponding expiration of the cuts in ordinary income tax rates, the top rate on dividends will be 39.6% (federal). This will be a resumption of the Clinton-era top income tax rate.

In addition, starting in 2013 the new law increases the 1.45% Medicare portion of FICA taxes by .9% on wages exceeding $250,000 for married couples jointly or $200,000 for single taxpayers. Also, starting in 2013 (and in 2017 for individuals and their spouses age 65 or older) the floor for deducting medical expenses will increase from 7.5% to 10% of adjusted gross income.

However, twenty (20) states have now filed suit to overturn the new law on constitutional grounds. Where this will end up is anyone’s guess at this point? Very few such constitutional challenges are successful. What is apparent is that the trend of current tax law will create significant increases in many individual’s personal income taxes at almost all levels. The need for efficient tax planning is now even more necessary for the preservation of one’s wealth.

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