Who would have thought a con-servative judge's vote would land high-earners new income taxes and business owners new burdens? For the wealthy, wide-ranging are the implications of Chief Justice John Roberts's deciding vote that rendered constitutional the Patient Protection and Affordable Care Act.
What the U.S. Supreme Court ruled on, of course, was the controversial individual mandate: the requirement, beginning in 2014, that every American carry health insurance or pay a penalty. The levy can be up to 1% of income in 2014, rising to 2.5% by 2016, although the penalty can not exceed a figure estimated in 2016 to be as much as $12,500 for a family or $5,000 for an individual, according to the Congressional Budget Office.
Health-care reform may have a green light, but much of the law remains gray. For high-net-worth individuals and families, particularly those who run a business, guidance is in the offing.
Then again, many provisions are crystal clear.
Beginning in 2013, two new income taxes, which estimated tax payments must account for, apply to joint filers with incomes above $250,000 and singles above $200,000-figures that won't be inflation-indexed. The taxes are assessed on the income that exceeds these thresholds.
The first is 0.9% on earned income such as salaries, commissions and self-employment profits. Often referred to as the Medicare Hospital Insurance Tax, the Internal Revenue Service called it the "Additional Medicare Tax" in an informative FAQ available at www.irs.gov.
Whatever its name, the tax is on household earned income. If one spouse's salary is $170,000 and the other's is $130,000, the couple will pay 0.9% on $50,000 ($300,000 household earning income, minus the $250,000 threshold).
Now here's the rub: Withholding doesn't begin until an employee hits the $200,000 mark. That means neither spouse in our example would have the tax withheld. The same holds true for a single client who earns, say, $125,000 from each of two different employers.
The opposite problem, over-withholding, can result in other cases. Take a married client with a $225,000 salary and a non-working spouse. The worker will have tax withheld on $25,000 even though the couple won't owe this tax since their combined earned income is under $250,000. The withholding would be credited to the couple on their Form 1040.
Happily for business owners, employers don't match this payroll tax. Self-employed individuals thus pay the same 0.9% rate employees do.
Surtax Rules
More concerning is the 3.8% Unearned Income Medicare Contribution Tax, frequently called the tax on investment income or the health-care surtax. It is 3.8% of whichever is smaller: the client's net investment income, or the amount by which the client's modified adjusted gross income (MAGI) exceeds the $250,000-joint/$200,000-single threshold.