Effective with the tax year beginning January 1, 2013,
individuals who meet certain provisions of the Affordable Care Act (ACA) will
be subject to an additional tax assessment when filing their 2013 returns. When evaluating the ACA, there are two
provisions that may potentially affect you and the individual tax rate
applicable to you: the Net Investment Income
Tax (3.8%) and the Medicare Tax (0.9%).
First off, there is the provision affecting individuals who
have Net Investment Income (NII) and whose Modified Adjusted
Gross Income (MAGI) income exceeds $200,000 for single filers, $250,000 for
those married filing jointly, and $125,000 for those married filing separately. The NII tax is computed on the lesser
of one’s NII for the year or the excess of MAGI above the defined
threshold amounts. This provision is
said to target those who have “unearned income” whose MAGI exceeds the
specified figures defined above ($200,000 for single filers, $250,000 for those
married filing jointly, and $125,000 for those married filing separately). In other words, NII is equivalent to one’s
“unearned income.” According to the ACA,
“unearned income” includes interest, dividends, annuities, royalties, rents,
passive activity income, capital gains, trade or business income in regards to
the trading of financial instruments or commodities, and any oil or gas
payments or royalties received, etc.
However, for computing the taxability of one’s unearned income, there
are also certain deductions considered attributable to one’s investment income
that may be subtracted in determining the NII considered taxable under the
ACA. These deductions include rent and
royalty deductions and certain investment expenses such as investment interest
expense and other fees and taxes allocable to investments, etc. The net result after subtracting these deductions
from one’s unearned income should then be compared with the portion of the
individual’s MAGI in excess of the threshold amounts defined. The
lesser of these two figures is the portion of one’s income subject to the new
NII tax of 3.8%.
The second provision affecting individuals as part of the
ACA pertains to individuals whose “earned income” exceeds $200,000 for single
filers, $250,000 for those married filing jointly, and $125,000 for those
married filing separately. Earned income
for purposes of the ACA includes any earned wages/W-2 income, self-employment
income, or any other form of earned compensation. If earned wages exceed these
defined thresholds ($200,000 for single filers, $250,000 for those married
filing jointly, and $125,000 for those married filing separately) then an
additional tax of 0.9% is applied.
Overall, if your earned income or MAGI is below the
specified thresholds ($200,000 for single filers, $250,000 for those married
filing jointly, and $125,000 for those married filing separately) then neither
the Net Investment Income Tax nor the Medicare Tax will affect you. However, if your income happens to fall above
these ranges, you must first determine what items make up your income and
whether they are considered “earned income” or “unearned income.” Below are some quick flowcharts to resort to
in determining how the ACA may affect you.
Kristin Coleman, CPA
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