QUOTED AND LINKED IN JANUARY 11, 2013 WALL STREET JOURNAL
And you thought that the tax law was already too complex. As a result of President Obama's signing on January 2nd of the American Taxpayer Relief Act of 2012 following changes legislated by the 2010 Health Care Reform Act effective beginning in 2013, there are now five different definitions of income affecting seven different tax areas. With a schizophrenic name ("Taxpayer Relief Act"), this comes as no surprise.
Although the most publicized affected income level is individuals with taxable income exceeding $400,000 for single tax filers and $450,000 for married filing joint tax filers, everyone with employment or self-employment income of any amount with limited exceptions will pay more tax in 2013 than they did in 2012, all else being equal.
Exhibit 1 summarizes 2013 individual federal income-based tax law changes, comparing each one with the law in effect in 2012. The five different definitions of income are as follows, with dollars amounts depending upon single vs. married filing joint tax status with the exception of #1 which applies to everyone with earned income with limited exceptions:
- Earned income of between $0 and $113,700
- Earned income and modified adjusted gross income exceeding $200,000 or $250,000
- Modified adjusted gross income exceeding $200,000 or $250,000
- Adjusted gross income exceeding $250,000 or $300,000
- Taxable income exceeding $400,000 or $450,000
The first three definitions of income will be discussed in the remainder of this post, with the last two deferred to next week's post.
Earned Income Between $0 and $113,700
The employee Social Security tax rate which was reduced from 6.2% to 4.2% for 2011 and 2012 is back to 6.2% beginning in 2013. In addition, the Social Security wage base, which was $106,800 in 2010 and 2011 and $110,100 in 2012 is $113,700 in 2013. This translates to a Social Security tax increase of $2,425.20 in 2013 vs. 2012 for individuals with Social Security wages of at least $113,700, with the tax going from $4,624.20 (110,100 x 4.2%) in 2012 to $7,049.40 ($113,700 x 6.2%) in 2013.
Earned Income and Modified Adjusted Gross Income Exceeding $200,000 or $250,000
In recent years, everyone with earned income has been subject to Medicare tax at a rate of 1.45% on all earned income with limited exceptions. Beginning in 2013, the rate is increased by 0.9% to 2.35% on earned income exceeding $200,000 if single or $250,000 if married filing joint if modified adjusted gross income ("MAGI") also exceeds the specified threshold amounts. MAGI is adjusted gross income ("AGI") with certain adjustments, the details of which are beyond the scope of this post.
Modified Adjusted Gross Income Exceeding $200,000 or $250,000
The first two definitions of income are dependent upon the presence of earned income. It doesn't matter if you have any earned income for purposes of meeting the next three definitions of income. If your MAGI exceeds $200,000 if single or $250,000 if married filing joint, and you have investment income, you will be subject to the new Medicare investment income tax. The tax is assessed at a rate of 3.8% on the lesser of net investment income or MAGI in excess of the specified threshold amounts. Net investment income includes taxable interest, dividends, and capital gains.
If you have income of at least $100,000 and you haven't retired TurboTax and rehired your CPA yet, I'll guarantee you will do so after reading part 2 of this post.