Tax Planning
Now that the U.S. Supreme Court has generally upheld 2010’s health care act, it’s important to consider how it will affect your tax liability. One way might be your Medicare tax liability.
Under the act, starting in 2013, higher-income taxpayers will be subject to an additional 0.9% tax on wages and self-employment income that exceed specified thresholds, generally $200,000 for single filers and heads of households and $250,000 for married taxpayers filing jointly ($125,000 for married taxpayers filing separately).
On top of that, taxpayers are scheduled to be subject to a new 3.8% Medicare tax on net investment income to the extent that their modified adjusted gross income (MAGI) exceeds specified thresholds, also generally $200,000 for single filers and heads of households and $250,000 for married taxpayers filing jointly ($125,000 for married taxpayers filing separately).
Investment income does not include distributions from IRAs, pensions, 401(k) plans or other qualified retirement plans. But distributions from these plans could trigger additional Medicare taxes on net investment income by increasing MAGI.
If your income might be high enough to subject you to these additional taxes next year, consider accelerating income into 2012 where possible. However, you’ll need to keep in mind whether such actions could trigger the alternative minimum tax.
Also consider whether, before year end, you should sell highly appreciated assets you’ve held long term. It may make sense to recognize gains now rather than risk paying Medicare tax on them next year.
These strategies may also prove beneficial if ordinary and long-term capital gains rates increase as scheduled next year. But keep an eye on Congress: A repeal of the provision imposing the additional Medicare tax (as well as an extension of current income and long-term capital gains rates) could occur.