Tax hikes are upon us - planning information - John R. Dundon II, Enrolled Agent
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Tax hikes are upon us – planning information

Tax hikes are upon us – planning information

With the enactment of an enhanced federal role in medical care comes the need for revenue enhancement. The age of new tax hikes is upon us. Some planning information.

  1. 3.8% “Medicare” tax on investment income and an additional 0.9% Medicare tax on wages – Beginning in 2013 workers at all income levels could be squeezed by new limits on medical flexible spending accounts and medical deductions. The 3.8% investment tax, combined with the expected – Jan. 1, 2011 – expiration of tax cuts, would produce a 2013 top federal income tax rate of 23.8% on long-term capital gains from the sale of securities, up from 15% now. The top rate on interest, rents, royalties and certain “passive income” would rise to 43.4% from 35%.

  2. Over-the counter medication – Beginning next year money stashed in pretax FSAs, health savings accounts and health reimbursement accounts may no longer be used for over-the-counter medications other than insulin, unless prescribed by a doctor.

  3. FSA Contributions capped – Beginning in 2013, the amount you can shelter pretax in an FSA will be restricted to $2,500 a year, an amount that will then be indexed for inflation. That means accordingly that you should consider planning to put aside pretax money in 2011 or 2012 for such big-ticket items as orthodontia and Lasik surgery. You must have the procedure done that same year, since any pretax money not used each year is forfeited.

  4. Out of pocket medical cost deduction – Note that it will also become more difficult as of 2013 to write off out-of-pocket medical costs on your 1040–taxpayers under 65 will be able to deduct such costs only to the extent they exceed 10% of adjusted gross income, up from 7.5% now. (Older taxpayers can still use the 7.5% threshold through 2016.)

  5. Capital gains and ordinary income – tax rates are heading back up again.

  6. Additional Medicare Wage Tax – Beginning in 2013 there’s an additional 0.9% Medicare tax on gross compensation–meaning before 401(k) or other pre-income-tax deductions–of more than $200,000 for individuals or $250,000 for couples. This tax is paid solely by the employee and is on top of the current 2.9% Medicare payroll tax, split evenly between employer and employee.

  7. Deferring compensation If you’ve got nonqualified stock options that you can exercise, consider doing it this year–your gain at exercise is all taxed as compensation, subject to the ordinary income tax plus Medicare taxes.

  8. The marriage penalty – was already pretty severe for upper-middle-incomers with typical deductions, two $200,000 earners would see the second income kicked up from 28% and lower brackets to 33%. The penalty will get a lot worse, with a greater gulf between rates in the two highest brackets and rates in the brackets below.

  9. Surtax on Investment Income – The surtax will apply to interest, capital gains, annuities, rents, royalties, passive activity income and dividends. It’s unclear what the total rate on dividends will be. But if Congress doesn’t act, the top rate on dividends could move from 15% to 43.4%.

  10. Exempt from the surtax: retirement account distributions, capital gains from selling a principal residence and business income from a venture, such as a partnership or Subchapter S corporation you actively manage. (That means self-employed professionals can still cut their Medicare taxes by incorporating as an S corp. and treating some of their earnings as profits, not wages.)

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