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Tax Planning for Health Care Implementation
Written by: Dan Backus
Are you uncertain how the 2010 Affordable Care Act will affect your taxes for 2013 and beyond? We will briefly go over possible tax planning ideas for high wage earners, individuals with large investment income, and business owners.
The taxpayer they will now consider to be “high income earners” will be based on meeting certain thresholds. The magic numbers to watch for are $200,000 for filing single and $250,000 for married couples.
For the first time, “high income earners” have to take into account the 3.8% tax surtax on unearned income once the threshold is met for a Modified Adjusted Gross Income (MAGI). Unearned income is income from property income, investments, interest and dividends.
Separately, an additional 0.9% Medicare tax applies to those receiving earned income (W-2’s, certain business income) in excess the threshold. (The threshold being 200k for single and 250k married.)
Taxpayers that earn the majority of their income through wages (W-2’s) are more likely to benefit from compensation deferral. These opportunities are predominantly available through your employer and should be considered.
- Retirement plans such as a 401(k) or 403(b)
- If no retirement plan is in place, you could be eligible for a deductible Traditional IRA contribution
- Utilize your employer's health flexible spending account (FSA) to set aside pre-tax compensation for expected medical expenses
- Make contribution to a health savings account (HSA) up to the yearly limit to ensure a tax deduction while having that money roll over for use in future years
The new net investment income tax of 3.8% is a big concern for individuals that do not recognize what is considered “investment income.” The more common components are interest, dividends, rental income, stock sales, and passive activities. Tax planning can lessen any burden from this new tax through reduction of investment income or gross income. Please talk with your financial advisor on investment plans as planning will need to consider more than the tax effect.
- Sale of investments at a loss to offset the current year gains from investments or property
- Invest in tax-exempt bonds or stocks with limited dividend activity for long term planning of year to year tax impact
- Watch any conversion of Traditional IRA plans to Roth IRA plans as this will be included in the calculation for the year performed
- Increasing day to day involvement with regards to rental properties and passive business activities can lessen your tax burden. Meaning they can be treated as ordinary income, exempting these activities from this new 3.8% investment income tax.
Business owners are provided an array of tax planning options to avoid reaching the “high income earner” limits. Depending on how your business is organized, your annual profit will determine how to best utilize the following. These strategies are great options for businesses that will have a taxable profit and cash-on-hand at year end.
- Beginning in 2014, the dollar limit for an accelerated depreciation election (Section 179) will drop from $500,000 in 2013 to $25,000.
- 2013 is also the last year to make a purchase that qualifies for 50% bonus on first year depreciation if bought and placed in service this year.
- If you are self-employed and haven't done so yet, set up a self-employed retirement plan.
- Provide payroll to dependent children to be taxed at their lower rate while reducing taxable income at your tax rate.
Not all actions will apply in your particular situation, but you will likely benefit from many of them. As always, however, year-end tax planning doesn't occur in a vacuum. It must take account of each taxpayer's particular situation and planning goals, with the aim of minimizing taxes to the greatest extent possible.