Now that health care reform has been upheld by the Supreme Court, a new series of tax hikes are poised to take effect in 2013. The Supreme Court recently decided that the provisions of the law requiring people without health coverage to buy insurance or pay a fee is constitutional under Congress’ power to impose taxes. While vowing to overturn the entire health reform law if elected, Mitt Romney and the Republicans would have to not only retake the White House and Senate, they would also have to retain the House this November to have any chance of reversing this law. With that being far from certain, and requiring a lot of things to go right for Mitt Romney as his campaign comes down the home stretch, it probably makes sense to take a look at what is likely to happen in 2013.
As with most tax legislation that is enacted, the two key tax provisions that become effective in 2013 will affect higher income taxpayers and will be complex enough to require multiple calculations to determine the amount of additional tax you may owe. The two main provisions of these tax increases involve a 0.9% Medicare surtax on singles with wages exceeding $200,000 and couples earning over $250,000. This applies only to the employee’s share (compared to the current Medicare tax that is shared equally with the employee and employer). In addition, unearned income will be subject to a 3.8% Medicare surtax for singles with modified adjusted gross incomes (AGI) over $200,000 and marrieds over $250,000. Modified AGI is AGI plus tax free foreign earned income. The new levy applies to the lesser of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but not tax free interest or payouts from retirement plans. As you can see, very few categories of investment related income are going to escape this new tax!
In addition to these new taxes, the 7.5%-of-AGI floor for deducting medical expenses will jump to 10% for filers under 65 years of age. This increase will not apply to those over 65 and older until 2017. An additional tax of 2.3% on medical devices will also take effect; however, items sold at retail, such as glasses, contact lenses and hearing aids will be exempt from this tax.
Planning for the Future
To be prepared for the changes coming in 2013, you should begin to make projections regarding your expected income over the next several years. If you have the flexibility in terms of when you receive certain income payments, you may want to consider timing these cash flows accordingly. For example, if you fall into one of the following three categories, you may want to consider these issues:
- Pre-retirees : If you are planning on retiring at the end of 2012 and you have substantial compensation or income streams that will continue into future years, you may want to consider accelerating them into 2012 to avoid hitting the income limits mentioned above and thus avoiding these additional taxes.
- Employees with sizable company stock benefits : If you are holding nonqualified stock options (NSA’s) that will create taxable income when exercised, you may want to consider the possibility of exercising them sooner rather than later to avoid the additional 0.9% tax and the effect on your MAGI, which could also increase and trigger the 3.8% tax on investment income.
- Self-employed individuals: If you are self-employed, you will want to take a close look at your projected income and expenses in 2012 and 2013 in order to determine whether it makes sense to accelerate or defer certain expenses to control your taxable income in 2013 and thereafter.
These thresholds are not indexed for inflation. An increasing number of taxpayers could be subjected to this tax increase as inflation boosts wages over time. In summary, while these tax increases may seem straightforward on the surface, the actual calculations can be complex and require multiple calculations depending on the specific circumstances of each individual or couple. If you are subject to these new taxes based on the income levels above, you and your tax advisor will need to pay close attention to both your projected MAGI and net investment income.