Blog & News
2013 Obamacare Taxes for High Income Earners
Wednesday, September 17, 2014
Rob Lemmons, CFP®, CPA, AIF®, CEPA
As described in the highly acclaimed book, The Quiet Millionaire, one of the seven major obstacles to financial success is paying too much tax. Proactive tax planning throughout the year is the key to reducing taxes and maximizing your after-tax dollars for wealth accumulation. This is accomplished by applying changing tax laws to your specific situation. This will become increasingly important as many high income earners begin to feel the impact of additional taxes due to the new IRS provisions imposed by The Patient Protection and Affordable Care Act (PPACA), more publicly known as “Obamacare”.
There are two new provisions beginning in 2013. First, the employee portion of the Medicare tax will increase .9% on wages in excess of the threshold amount. This includes all W-2 and self-employment income. Second, a 3.8% Medicare tax will be imposed on the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds the threshold amount.
How do Obamacare Taxes Work?
Additional .9% Medicare Tax
The Federal Insurance Contributions Act imposes a 1.45% tax on each employee’s wages and self-employment income for Medicare tax. Beginning January 1, 2013 the PPACA imposes an additional .9% Medicare tax on those wages and self-employment income that exceeds the threshold amount. The threshold amount is $250,000 for married individuals filing a joint tax return, $125,000 for those married filing separately, and $200,000 for single filers.
The employer is only required to withhold the .9% tax on wages that exceed $200,000 even though a taxpayer’s wages may be subject to the tax on wages below $200,000. For example if the taxpayer has wages of $150,000 and the spouse has wages of $150,000, $50,000 of the combined wages will be subject to the tax, but both employers will not be responsible for withholding the tax because both individual’s wages were below $200,000. The .9% Medicare tax that is owed but not subject to withholding must be taken into consideration in determining estimated tax payments.
3.8% Medicare Contributions Tax
In addition, effective January 1, 2013 the new law imposes a 3.8% Medicare tax on the lesser of net investment income or the amount by which Modified Adjusted Gross Income (MAGI) exceeds the threshold amount. MAGI is defined as adjusted gross income increased by any foreign earned income that was excluded from gross income after allowance for deductions. The threshold amount is $250,000 for joint return filers, $125,000 for married filing separately, and $200,000 for any other filing status.
Investment income includes interest, dividends, capital gains, annuities, royalties and rents other than those derived from an active business. This pretty much includes any income not derived from an active business or employee compensation. Investment income excludes distributions from qualified retirement plans including IRA distributions as well as tax-exempt interest. The taxpayer will be responsible for paying this tax liability and it must be considered in determining estimated tax payments.
Tax planning is complex and requires the guidance of a trusted and experienced advisor, such as a fee-only Certified Financial Planner™ (CFP®), who plans comprehensively, and with a complete understanding of your particular concerns and goals in life.
For more information about the quiet millionaire® approach, please visit us at www.twpteam.com or contact directly Rob Lemmons, CFP®, CPA, AIF at 513-984-6696.