The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Act") was signed by President Obama on December 17, 2010. From a short-term perspective, the Act contains a lot of good news. However, the good news ends after 2012. Starting in 2013, tax rates are scheduled to increase because of the sunset of the law under the Act. In addition, under the Patient Protection and Affordable Care Act of 2010 (the "Patient Act"), which was signed into law by the President on March 23, 2010, tax rates on high income taxpayers are scheduled to increase.
2011 - 2012 - Bush-era tax rate extension
For 2011 and 2012, the favorable tax rates from the Bush-era are extended. For these years, the lowest individual tax rate will continue to be 10%, the highest rate will continue to be 35%, and in general, the rate on capital gains and qualified dividends will stay at 15%. Great for these years, but things change dramatically in 2013.
2013 - The sunset of the Act
The favorable income tax rates in 2011 and 2012 will be no more starting in 2013. Rates are scheduled to increase from 15% on the low-end to 39.6% on the high-end. Capital gains will generally be taxed at 20% and dividend income will be taxed at ordinary income rates.
2013 - New investment income Medicare contribution tax
Under the Patient Act, starting in 2013, high income taxpayers will be subject to an additional Medicare tax on investment income of 3.8%. A high income taxpayer is defined as an individual, estate or trust with the lesser of net investment income or modified adjusted gross income exceeding $250,000 if married filing joint or $200,000 if filing single. Taxpayers with income exceeding the threshold will pay an additional 3.8% tax on investment income including interest, dividends, and most capital gains.
2013 - New additional Medicare payroll tax
Under the Patient Act, starting in 2013, high earner taxpayers will also be subject to an additional Medicare payroll tax of .9%. A high income earner is defined as an individual whose wages exceeds $250,000 if married filing joint or $200,000 if filing single. Taxpayers with earnings exceeding the threshold will pay an additional .9% tax on income from wages and self-employment. The tax is only paid by employees and is in addition to the existing 1.45% Medicare tax that employees currently pay on earned income. Be aware that for married individuals filing a joint return, the additional tax is calculated based on the combined wages of both spouses.
So what should you do? Our recommendation is to take steps in 2011 and 2012 to help combat the 2013 tax increase. One strategy may be to consider selling appreciated capital assets in 2011 or 2012 in order to take advantage of the 15% rates before they increase in 2013. For many, the answer is not as clear.
Please call us at 616-458-1835 or email us at bshmail@bshcpa.com if you have any questions regarding the individual income tax increases or if you want to schedule a meeting to discuss the tax law change with one of our tax experts.
