Understanding How the New Wealth Taxes Will Affect You

The upcoming health care reform bill passed in March 2010 included new taxes to help pay for the changes to the health care system, which is designed to expand access to reliable and quality health coverage, all while helping tens of millions of Americans pay for it.  The new taxes will begin in 2013. The new wealth taxes will not affect everyone, but is targeted at individuals who are considered “wealthy” by most measurements.

The new wealth taxes affect couples who earn over $250,000 annually, or individuals earning $200,000 annually.  There are two new taxes including:

• 0.9% Medicare payroll tax on wages earned above the limits
• 3.8% tax on investment income

The 0.9% Tax on Wages

For an individual filing single, if the adjusted gross income is less than $200,000, you are not affected by these new wealth taxes.   If you are married and filing jointly, you are unaffected if your adjusted gross income is under $250,000.

For people earning over these limits in 2013 and after, you’ll pay 0.9% on all wages above the stated limits as a Medicare payroll tax.  So an individual earning $210,000 will pay 0.9% on $10,000.

Everyone already pays Medicare taxes from their paychecks, but only a portion of income from higher-income earning individuals and couples would receive this additional tax.

The 3.8% Tax on Investment Income

For all investment earnings that put you above the $200,000 adjusted gross income limitation for individuals or $250,000 adjustable gross income limitation for couples, you’ll pay a 3.8% tax on the investment income.

If you and your spouse have a combined adjusted gross income of $300,000, with $200,000 in wages and $100,000 from investment income – the $100,000 investment income will be taxed 3.8% because it puts you above the $250,000.   The tax is only paid on the amount of investment income which puts you above the income earning threshold.

Investment income applies to rents received as real estate investors, income from interest, annuities, capital gains, dividends, and royalties.

Investment income that is not included in the new 3.8% tax would be Traditional and Roth IRAs, retirement accounts including 401k, pensions, and Social Security.   Life insurance proceeds will also not be counted.

Selling a home with taxable gain can result in having to pay 3.8% tax on a portion of the proceeds, as well.