Beginning January 1, 2013, a new 3.8% Medicare tax will take effect, while at the same time many of the tax cuts and incentives passed over the past several years are scheduled to “sunset” on December 31, 2012 if Congress fails to take any action after the Presidential election.
The Patient Protection and Affordable Care Act, known as Obama Care, includes a new 3.8% Medicare tax for interest, dividends, passive income, i.e., capital gains for single taxpayers earning more than $200,000.00 per year, and married taxpayers earning more than $250,000.00 per year. The 3.8% Medicare tax does not apply to IRA or other retirement assets. In addition, if these taxpayers are working, there will be an additional payroll tax of .9% over the thresholds of $200,000.00 (single) or $250,000.00 (married).
In addition to Medicare tax increases, the “sunsetting” provisions (those that will take effect without any action of Congress) include:
1. Long Term Capital Gains. The current rate of 15% will increase to 20% and, therefore, with the additional 3.8% Medicare tax, the total rate on capital gains will be 23.8%.
2. Personal Income Tax Rates. Presently our tax rates range from 10% to 35%, and these will increase to 15% up to a maximum rate of 39.6%.
3. Dividends. The so-called Bush tax cuts changed the treatment of dividends from ordinary income to capital gains rates, which are currently 15%. The sunsetting of these tax cuts will result in dividends being taxed at ordinary income rates of up to 39.6%, together with the 3.8% Medicare tax, resulting in a total tax rate of 43.4% on dividends for higher earners.
In addition to the income tax changes, there are several important estate and gift tax changes that are scheduled to occur if there is no congressional action prior to year end, including:
1. Lifetime Exclusion Amounts. The current $5,000,000.00 exclusions amounts for gift, estate and generation-skipping taxes will be reduced to $1,000,000.00.
2. Tax Rates. The current rate of 35% will increase to a maximum rate of 55%.
3. Portability. The ability of a surviving spouse to utilize any unused exemptions of a deceased spouse ends on December 31, 2012.
If you would like any additional information or wish to make any changes to your estate plan in anticipation of these changes, please contact our Estate Planning group.