The Health Care Bill And The Taxes With It
The newly passed health-care bill includes two brand new tax schemes conceived by Congress and the Obama administration to fund the massive social entitlement. The new taxes are to be levied against singles with adjusted gross incomes over $200,000 and couples over $250,000; those already paying the most federal income taxes not only in dollars, but also with regard to their tax brackets.
A 0.9% tax is to be levied against AGI which exceeds the aforementioned limits and a 3.8% tax will apply to investment income exceeding $200,000 and $250,000 respectively of MAGI; modified adjusted gross income. MAGI is similar to AGI with the exception of certain exclusions which must be added back.
Additionally, the investment income tax component defies a long standing premise by applying employment tax to unearned income. Previously, payroll taxes (most predominantly Social Security and Medicare taxes) levied against wages. In addition to this tax increase on a minority segment of taxpayers, the balance of the health care initiative is to be funded by a crackdown on Medicare fraud and abuse; a noble effort that seems as though it should have been practiced since the inception of the Medicare entitlement program.
While the Internal Revenue Service hasn’t issued any guidance, the following are preliminary answers to a few of the most common questions taxpayers have been asking about the program:
The tax increases are scheduled to take effect in 2013. Is there a chance that they may be repealed before then? This scenario is highly unlikely as Congress would have to undo the healthcare reform legislation and President Obama would still be in a position to wield the veto pen.
How do the new taxes work? These are basically flat taxes. The Medicare levy which would be applied to all income exceeding the AGI limits. This equates to $9 per thousand of income above the limits. The investment income tax in the amount of 3.8% is just that; a tax on investment income. Investment income includes interest, dividends, rents, royalties and certain capital gains. The tax is applied to any investment income which exceeds the limits at a rate of $38 per thousand.
Will itemized deductions lower my AGI? No. Itemized deductions are deducted from AGI. Therefore, no Schedule A deductions will affect the taxes. Adjustments to income, such as HSA and traditional IRA contributions, alimony paid to a former spouse and educator expenses, will lower AGI and potentially ameliorate some or all of the new taxes.
What can I do to avoid paying these taxes? Examine both your regular and investment income. Think about converting your traditional IRA’s to Roth IRA’s. Consider a defined-benefit pension if you’re eligible and consider selling assets using the installment sale method. These, and other, strategies can help in lowering AGI which is the key factor in avoiding these taxes.
Rizzolo Group has many years experience helping small business owners decrease taxes and improve profitability. You need the right financial data and the right tax preparer who knows accounting bookkeeping, payroll services and gives you timely advice. Rizzolo Group does that!
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