REMINDER!

Second Quarter Estimated Tax Payments are due 6/15 

For any of our clients that pay estimated taxes, a reminder that voucher 2 is due June 15, 2012.  These vouchers were sent to you along with your 2011 income tax returns.  If you need a replacement copy, please contact us and we would be happy to provide you with one.

Dear Clients and Friends,

It's hard to believe another summer is already here.  Time seems to go by so quickly so get out and enjoy!

It seems like yesterday that President Obama passed what came to be known as "Obamacare", the Patient Protection and Affordable Care Act, but in reality it was more than 2 years ago.  At the time, the provisions of the Act were years away.  Now they take effect in just a few short months.  This issue of "News You Can Use" highlights one of the major provisions that will affect many taxpayers.  As always, we are available for any questions you may have.

Warm wishes for the warmer months!

Suzanne LoBiondo and Christopher Cheeseman

The Healthcare Act is funded in part through additional Medicare taxes set to take effect for tax years beginning in 2013.  Although the constitutionality of the  Act is being challenged, unless it is repealed or declared unconstitutional, these Medicare taxes are a reality.  It is possible that only a portion of the Act may be nullified (forcing health care coverage for all), leaving the tax provisions intact.

The Federal Insurance Contributions Act (FICA), imposes two taxes on employers and employees. The first finances the federal old-age, survivors and disability insurance (OASDI) program, more commonly known as Social Security. The second is to finance hospital and hospital service insurance (HI) for those 65 years of age or older, more familiarly known as Medicare.

The Medicare tax on an employee's wages consists of an employee's portion and an employer's portion. The employee's portion is 1.45 percent of the employee's wages. The employer's portion of the HI tax also equals 1.45 percent of the employee's wages. Thus, the equivalent of 2.9 percent of the employee's wages is contributed to Medicare. However, under the Patient Protection and Affordable Care Act , an additional 0.9 percent Medicare tax is imposed on the employee portion for individuals who have wages in excess of $200,000 ($250,000 in the case of married taxpayer's filing jointly, $125,000 in the case of a married taxpayer filing separately).

 Individuals engaged in trade or business as sole proprietors or partners must pay self-employment tax on net earnings from self-employment. Self-employment tax has two components. The OASDI component (Social Security) is imposed on net self-employment earnings up to the Social Security wage base. The HI component (Medicare) is imposed on net earnings from self-employment without limitation. The Medicare rate is 2.90 percent of all net earnings from self-employment. However, under the Patient Protection Act, an additional 0.9 percent Medicare tax is imposed on self-employment income in excess of $200,000 ($250,000 in the case of married taxpayer's filing jointly, $125,000 in the case of a married taxpayer filing separately).

 The Medicare tax has only been imposed on wages and net earnings from self-employment.  No Medicare tax has been imposed on investment income, until now.

Under the Act, a 3.8 percent Medicare tax is imposed on the lesser of (1) an individual's net investment income for the tax year or (2) modified AGI (MAGI) in excess of $200,000 ($250,000 in the case of joint filers and surviving spouses, and $125,000 in the case of a married taxpayer filing separately).

Net investment income. Net investment income is the excess of the sum of the following items less any otherwise allowable deductions properly allocable to such income or gain:

·         gross income from interest, dividends, annuities, royalties and rents unless such income derived is in the ordinary course of any trade or business;

·         other gross income from any passive trade or business; and

·         net gain included in computing taxable income that is attributable to the disposition of property other than property held in any trade or business that is not a passive trade or business.  

So what planning can be done to minimize the surtax?  Tax-exempt interest income is not considered net investment income, and is not included in MAGI, so restructuring your portfolio to invest in more municipal bonds may make sense.  If you're not currently maximizing your retirement plan contribution, you can do so to lower your MAGI.  Gifting of income-producing property to individuals in lower tax brackets can reduce net investment income as well as MAGI.

 Estates and trusts. Estates and trusts also must pay a 3.8 percent unearned income Medicare contribution tax on the lesser of; (1) their undistributed net investment income for the tax year, or (2) any excess of their AGI over the dollar amount at which the highest tax bracket for estates and trusts begins for the tax year.

Exclusions. The new 3.8 percent unearned income Medicare contribution tax does not apply to nonresident aliens or a trust whose unexpired interests are devoted to religious, charitable, scientific, literary, and/or educational purposes, and/or to foster national or international amateur sports competition (provided no part of its activities involve the provision of athletic facilities or equipment), and/or to the prevention of cruelty to children or animals

We will keep you updated of any changes as they occur.  In the meantime, if you have any questions, please contact us at 516-791-1303 or info@clcpasllp.com.