On June 28, 2012, the Supreme Court upheld the constitutionality of President Obama’s Patient Protection and Affordable Care Act of 2010 (PPACA). Investors and upper-income taxpayers should prepare for the new income tax levies that soon go into effect:
- Starting in 2013, a new Medicare tax will be imposed on investment income received by joint filers with adjusted gross income in excess of $250,000 and single filers with adjusted gross income in excess of $200,000. The tax is 3.8 percent and will be reported on income tax returns. “Investment income” includes dividends, short- and long-term capital gains, rents, annuities, gross income from passive business activities, royalties and interest, and similar items. Until the PPACA, only earned income generated Medicare taxes.
- If Congress and the President allow the Bush-era tax cuts to expire at the end of 2012, then the 2012 top rates of 15 percent on long-term capital gains and dividends will increase to 20 percent and 39.6 percent, respectively. Beginning in 2013, long-term capital gains could be taxed as high as 23.8 percent and dividends as high as 43.4 percent if the Bush-era tax cuts expire and the new Medicare tax on investment income applies.
- Currently, the Medicare tax on salary or self-employment income is 2.9 percent. PPACA raises the Medicare tax by 0.9 percent on salaries and self-employment income above $250,000 for joint filers or $200,000 for single filers. Note that on joint returns, the $250,000 threshold applies to combined earned income of both spouses, rather than separately to each spouse.
Clients potentially facing these new taxes should consider strategies such as (1) accelerating dividends and other investment income into 2012; (2) selling closely held businesses and other capital gain producing assets in 2012 rather than 2013; (3) accelerating earned income into 2012 to the extent possible under stock option, bonus or other incentive compensation arrangements; and (4) postponing large charitable gifts until 2013.