Tax hike for high-income earners expected in 2013

May 1, 2012

Many physicians may be joining other high-income taxpayers subject to an upcoming potentially large tax hike they may not even be aware of.

Q I've heard that taxes on investments will be going up next year. Is this true?

However, employers won't be responsible for determining whether a worker's combined income with his or her spouse subjected him or her to the new tax. Instead, some employees will have to remit Medicare taxes when they file their income tax returns, and some may get a tax credit for amounts overpaid. Married couples with combined income approaching $250,000 will have to keep tabs on both spouses' income to avoid an unexpected tax bill. Interestingly, while so many income thresholds for other purposes are indexed for inflation, these are not, making it more likely that more and more people will be subject to the higher tax in future years.

In addition, beginning in 2013, the new law requires that a 3.8% tax be imposed on net investment income (total investment income reduced by the deductions that are allocable to that income) exceeding thresholds of $200,000 for single taxpayers and $250,000 for married couples filing jointly. Investment income includes interest, dividends, annuity income, capital gains, rents, and royalties that are not derived in the ordinary course of trade or business, excluding active S corporation or partnership income. Capital gains, in this case, will also apply to home sales. Homeowners, who even after the recent real estate downturn are fortunate to be able to sell their home with a substantial profit, may also be hit with the tax. If they incur capital gains on a primary home sale exceeding $250,000 for individuals or $500,000 for a married couple and the income threshold is met, then the excess realized gain would also be subject to the 3.8% tax. It is important to note that the new tax will not apply to income in tax-deferred retirement accounts such as individual retirement accounts, 401(k) plans, pension plans, and profit-sharing plans.

Such a dramatic change to how investments may be potentially taxed is sure to confuse and surprise many "high-income" physicians next year. While changes with these laws can always occur, it is important to understand how the current enacted law may impact your current and future investment decisions.