By Frank Byrt
The American Institute of CPAs (AICPA) hosted a conference call January 17 to discuss compliance and planning issues surrounding the new 3.8 percent Medicare surtax that kicks in this year.
The panelists noted that the new regulations are complex and incorporate 150 pages of rules under the new law, the Patient Protection and Affordable Care Act, which went into effect on January 1. The additional tax provisions come as part of the Health Care and Education Reconciliation Act of 2010, which was ruled constitutional by the Supreme Court last June.
The discussion focused on issues tax return preparers need to be aware of that will result in changes and additional tax for high-income taxpayers. This includes increases in tax on earned and unearned income in 2013.
Beginning with the 2013 tax year, under Section 1411 of the tax code, a new 3.8 percent net investment income tax (NIIT) on unearned income will apply to all taxpayers whose income exceeds a certain "threshold amount", which is $200,000 for individuals and $250,000 for married couples filing jointly. This new NIIT will raise the marginal income tax rate for affected taxpayers in some instances to the 39.6% tax bracket to a marginal rate of 43.4%.
Estates and trusts will also be subject to the NIIT if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. The threshold amount was $11,650 in 2012.
Also, beginning in the 2013 tax year, individual taxpayers with earned income in excess of $200,000 or $250,000 if married filing jointly, will have to pay an additional 0.9% in Medicare taxes on earned income above these levels. Previously, workers paid a flat 1.45% of their wages into Medicare.
But it is important to note that "a taxpayer should never pay both the 0.9% tax on earned income and the 3.8% additional tax on net investment income on the same stream of income", the panel pointed out.
Tax planners can apply a wide range of strategies for reducing the NIIT, the panel said, including advising clients to buy municipal bonds, tax-deferred annuities, life insurance, or rental real estate, as well as using depletion allowances available from oil and gas investments, or by making optimal timing choices for estates and trust distributions.
The NIIT will be paid on Form 1040 for individuals and on Form 1041 for estates and trusts. It is subject to the estimated tax penalties if not paid on time.
The IRS website contains more detailed information on the NIIT.
The program was hosted by Robert Keebler, CPA, of Keebler & Associates LLP. The panel included two IRS representatives, David Kirk and Adrienne Mikolashek, both of the Office of the Associate Chief Counsel of the IRS.