Category : tax

Change is Here: The American Taxpayer Relief Act of 2012 and New Obamacare Taxes in Review – Part II

Earlier this week we reviewed vital portions of the American Taxpayer Relief Act of 2012. As a continuation to the prior post, this week we will review the new taxes that took effect January 1st 2013 under the Patient Protection and Affordable Care Act, otherwise known as Obamacare. To view the first installment, please click here.

Surtax on Investment Income

High income earners, meaning those earning over $200,000 filing as single or $200,000 for married couples filing jointly, can now be expected to see a 3.8% Medicare surtax on their investment incomes. This new law applies to all forms of investment income, including interest, capital gains, and dividends so long as they are above the $200,000 threshold. This tax is expected to bring $123 billion in revenue.

Higher Medicare Payroll Taxes
Individuals earning over the $200,000 threshold and filing as single or $250,000 and filing as married will see a raise in their Medicare payroll tax of 0.9%. This is an increase from the prior years’ 1.45%. This is expected to raise $86.6 billion.

Medical Device Tax
Affecting a relatively small group of the population, the medical device tax will impact approximately 360,000 people who are currently employed in the medical manufacturing industry. The new law places a 2.3% excise tax on medical devices that retail over $100. This new tax has come under great scrutiny, as it is imposed on the sale of items as opposed to the profit garnered from the sale of these items. As a result, many medical device manufacturing companies will be forced to raise prices – decreasing the facility to engage in technical innovation. The medical device tax is excepted to raise $20 billion in revenue.

Limits on Itemized Medical Expense Deductions
Generating $15.2 billion in revenue, the Patient Protection and Affordable Care Act modifies the previous limits on itemized medical expense deductions from the original 7.5% to a new high of 10% of adjusted gross income. While this 10% will be the going rate for all Americans regardless of what tax bracket they may find themselves in, seniors 65+ will be eligible to use the old 7.5% rate for the next three years.

Flexible Spending Account Limits
Starting January 1st 2013 flexible spending accounts (FSA) and similar pre-tax accounts will no longer be welcoming unlimited contributions, rather they will henceforth be capped at $2,500 annually. Much controversy has surrounded this new law, as many families with special needs children use said FSAs to pay for tuition and special needs childcare related expenses. Despite such unabashed criticisms, the law is expected to garner $13 billion in revenue and will only affect a small minority of FSA users, as many employers have already independently chosen to cap FSA allowances prior to the passage of the law.

Change is Here: The American Taxpayer Relief Act of 2012 and New Obamacare Taxes in Review – Part I

Narrowly missing their midnight deadline, the Congress averted the impending “fiscal cliff” through passage of the American Taxpayer Relief Act of 2012 with a vote of 89-8 in the Senate, and 257-167 in the House. The president then signed the bill into law on January 2, 2013. Now that the fiscal cliff crisis has been averted, it is essential to review the changes that are to come with the passage of the American Taxpayer Relief Act, as well as the new provisions of the Patient Protection and Affordable Care Act, henceforth referred to as Obamacare, that will take effect January 1st 2013.

American Taxpayer Relief Act of 2012
Marginal Rates
Effective January 1st 2013, the American Taxpayer Relief Act modifies the Bush era tax cuts by implementing sunsets for individuals with incomes above $400,000 for single individuals and $450,000 for families. Individuals earning above the $400,000 mark will see a tax increase of 4.6%, from the previous 35%. For all other individuals in lower tax brackets, marginal rates will stay the same as they were during the Bush era tax cuts.

Capital Gains and Dividends
For capital gains and dividends, the same threshold as described above will be used. The rate for individuals earning over $400,000 will increase to 20% – a 5% increase from the year prior. All other tax brackets will remain at 15%. Joint filers earning below $72,500 and single filers earning less than $36,250 will be taxed at 0%.

Estate Taxes
Both estate and gift taxes have raised to 40% with the exemption being set at $5 million adjusted for inflation. This is a 5% increase from prior years.

Alternative Minimum Tax
Changes to the Alternative Minimum Tax (AMT) include increases to exemption amounts, an allowance of nonrefundable personal credits to the full amount of the person’s regular tax and AMT, and a yearly adjustment for inflation.

Personal Exemption Phase-Outs and Pease
Personal Exemption Phase-Outs, which were suspended under the Bush tax cuts, have been revived albeit at higher levels than in the past. Pease has also been reinstated also with a higher applicable threshold. All dollar amount thresholds required for both PEP and Pease will now be adjusted for tax years following 2013.

Education
One of the Obama Administration’s centerpieces, the American Opportunity Tax Credit (AOTC) has been extended to 2017. The credit provides up to a $2,500 tuition reimbursement for qualifying students. The credit was also modified so that students would be eligible for the credit for a total of four years, as opposed to the prior instated two year maximum. Mutually exclusive with the AOTC, the act extends above-the-line deductions for qualified tuition and related educational expenses.

Mortgage Debt Relief
To give homeowners struggling to make payments relief, the Mortgage Debt Relief Act of 2007 was extended so that homeowners may exclude canceled debt from being taxed on their principal residence up to $2 million.

Business Extenders
A variety of business extenders were included in the Taxpayer Relief Act including extension of the Work Opportunity Tax Credit (WOTC). The WOTC provides a credit for businesses that employ individuals who may be considered targeted groups as per the Federal Government. Such businesses will be provided a credit of up to 40% of the individual’s yearly wages for a maximum of $6,000. To the surprise of many, the research tax credit was also extended with bi-partisan support. Criticized for its annual $1.43 billion cost, the act rewards businesses that choose to invest in qualified research opportunities.

Part two of this segment, which is to be released in the following days, will include a review of the new Obamcare taxes that are to be implemented starting January 1st 2013. You will be able to access the new post here.