At the beginning of 2013, new tax laws were implemented at the federal level (we'll address California tax issues in another blog). There were some substantial changes. Whether these new tax laws will impact your tax situation is completely dependent on your personal tax circumstances, so we will touch on a few key items that will be impacting our clients to give you a little food for thought.
Unearned income: 3.8% tax may be added on top of everything else you are paying. When might that happen? If you have unearned income (dividends, interest and other investments within which you don't materially participate) and your adjusted gross income (AGI) exceeds $200k (if you are single) or $250k (if you file married filing joint). I'll refer to these AGI thresholds again, so I'll just refer to them as AGI thresholds later.
Earned income: 0.9% on earned income when your AGI exceeds the AGI thresholds (mentioned above). What is earned income? Income on your W2 and net income from self employment.
Why the 3.8% and the 0.9%? Seems like odd percentages, huh? There is some logic to these %. This tax is being used, supposedly, to fund the Obama Care act. So, the tax is based on the medicare tax that we all pay now. If you have earned income, you are paying medicare tax on your current earnings. Between you and your employer, the total medicare tax paid on your compensation is 2.9%. So, if you add 0.9% to this medicare tax, you arrive at 3.8%. So, the 0.9% tax "trues up" medicare tax to the higher income folks to 3.8%. And then, because unearned income was previously not subject to medicare tax, the new law now imposes a medicare tax on income formerly not subject to this tax at the full 3.8% level.
Is your head spinning yet? We are just getting started......we'll be posting more blogs on other tax topics that are new or adjusted in 2013 in the days ahead.
How do you figure out if this impacts you? That's what we are here for. Just send us an email or give us a call to schedule an appointment.