Recent Developments

A bevy of new tax
and related changes has been enacted as part of the 2010 Health Care Act (PL
111-148, 3/23/2010 ) and the 2010 Reconciliation Act. Here’s a couple:

■ Currently, wages are subject to a 2.9% Medicare payroll
tax. Workers and employers each pay ½, or 1.45%. If you’re self-employed you
pay it all but get an income tax write-off for ½. This Medicare tax is assessed
on all earnings or wages without a cap. These taxes fund the Medicare hospital
insurance trust fund which pays hospital bills for those 65+ or disabled.
Starting in 2013 a .9% Medicare tax will be imposed on wages and
self-employment income over $200,000 for singles and $250,000 for married
couples. That makes the marginal tax rate 2.35% Self-employed persons will face
a 3.8% on earnings over the above amounts. Look for more changes like this, a
few percent here, a few percent there instead of just the rate increases needed
to raise revenues. The result will make tax planning and preparing projections
increasingly complex.

■ Only wages and
earnings are subject to the Medicare tax above, but starting in 2013 the 3.8%
Medicare tax will apply to net investment income if your adjusted gross income
(AGI) is over $200,000 single ($250,000 joint) threshold amounts. These amounts
are not supposed to be indexed so inflation will erode these overtime. Net
investment income includes interest, dividends, royalties, rents, gross income
from a passive business, and net gain from property sales. You can reduce net
investment income by properly allocable deductions. Your advisers may have to
allocate their bills by category to help. This tax won’t apply to retirement
assets. Roth IRAs are lookin’ better. Earnings on non-IRA investments could be
subject to this higher tax, but if used to pay tax on a Roth conversion the
earnings will all be inside the tax deferred Roth thereafter.