The way I understand the tax increases in the Healthcare package, a new Medicare tax of 3.8% will be applied to almost all sources of income above a certain level.
But a TP can avoid this 3.8% tax by placing funds in a qualified retirement account -- since withdrawals from such an account are not subject to the added 3.8%. Including Roth accounts.
Is my understanding correct? If so, this would seem to tilt things further in favor of Roth conversions.
Is the above correct?
Steve
Bill Signed by President:
Starting in 2013, there is a Medicare surtax of .9% on earnings ABOVE $200,000 for an individual ($250,000 on a joint return).
Reconciliation Bill (Passed by House)
Starting in 2013 there is a 3.8% Medicare tax on ALL unearned income for an individual with income above $200,000 ($250,000 joint return) or if lesser, the amount that MAGI exceeds the $200K/$250K threshold.
For definitions of unearned income and MAGI, see the actual text of the new proposed law below:
SEC. 1411. IMPOSITION OF TAX.
`(a) In General- Except as provided in subsection (e)--
`(1) APPLICATION TO INDIVIDUALS- In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to
3.8 percent of the lesser of--`(A) net investment income for such taxable year, or
`(B) the excess (if any) of--
`(i) the modified adjusted gross income for such taxable year, over
`(ii) the threshold amount.
`(2) APPLICATION TO ESTATES AND TRUSTS- In the case of an estate or trust, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax of 3.8 percent of the lesser of--
`(A) the undistributed net investment income for such taxable year, or
`(B) the excess (if any) of--
`(i) the adjusted gross income (as defined in section 67(e)) for such taxable year, over
`(ii) the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year.
`(b) Threshold Amount- For purposes of this chapter, the term `threshold amount' means--
`(1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section
2(a)), $250,000,`(2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, 1/2 of the dollar amount determined under paragraph (1), and
`(3) in any other case, $200,000.
`(c) Net Investment Income- For purposes of this chapter--
`(1) IN GENERAL- The term `net investment income' means the excess (if any) of--
`(A) the sum of--
`(i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2),
`(ii) other gross income derived from a trade or business described in paragraph (2), and
`(iii) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business not described in paragraph (2), over
`(B) the deductions allowed by this subtitle which are properly allocable to such gross income or net gain.
`(2) TRADES AND BUSINESSES TO WHICH TAX APPLIES- A trade or business is described in this paragraph if such trade or business is--
`(A) a passive activity (within the meaning of section 469) with respect to the taxpayer, or
`(B) a trade or business of trading in financial instruments or commodities (as defined in section
475(e)(2)).`(3) INCOME ON INVESTMENT OF WORKING CAPITAL SUBJECT TO TAX- A rule similar to the rule of section 469(e)(1)(B) shall apply for purposes of this subsection.
`(4) EXCEPTION FOR CERTAIN ACTIVE INTERESTS IN PARTNERSHIPS AND S CORPORATIONS- In the case of a disposition of an interest in a partnership or S corporation--
`(A) gain from such disposition shall be taken into account under clause (iii) of paragraph (1)(A) only to the extent of the net gain which would be so taken into account by the transferor if all property of the partnership or S corporation were sold for fair market value immediately before the disposition of such interest, and
`(B) a rule similar to the rule of subparagraph (A) shall apply to a loss from such disposition.
`(5) EXCEPTION FOR DISTRIBUTIONS FROM QUALIFIED PLANS- The term `net investment income' shall not include any distribution from a plan or arrangement described in section
401(a), 403(a), 403(b), 408, 408A, or 457(b).`(6) SPECIAL RULE- Net investment income shall not include any item taken into account in determining self-employment income for such taxable year on which a tax is imposed by section 1401(b).
`(d) Modified Adjusted Gross Income- For purposes of this chapter, the term `modified adjusted gross income' means adjusted gross income increased by the excess of--
`(1) the amount excluded from gross income under section 911(a)(1), over
`(2) the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) with respect to the amounts described in paragraph (1).
`(e) Nonapplication of Section- This section shall not apply to--
`(1) a nonresident alien, or
`(2) a trust all of the unexpired interests in which are devoted to one or more of the purposes described in section
170(c)(2)(B).'.(2) ESTIMATED TAXES- Section 6654 of the Internal Revenue Code of 1986 is amended--
(A) in subsection (a), by striking `and the tax under chapter 2' and inserting `the tax under chapter 2, and the tax under chapter 2A'; and
(B) in subsection (f)--
(i) by striking `minus' at the end of paragraph (2) and inserting `plus'; and
(ii) by redesignating paragraph (3) as paragraph (4) and inserting after paragraph (2) the following new paragraph:
`(3) the taxes imposed by chapter 2A, minus'.
(3) CLERICAL AMENDMENT- The table of chapters for subtitle A of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after the item relating to chapter 2 the following new item:
Thanks.
I see 401(k) is not explicitly mentioned above but it is possible the interpretation is that "401(k) plans" are a sub-type of 401(a) plan. (I'd be interested in opinions on this.)
408 refers to IRA's, 408A to Roth's.Steve
in the Healthcare package,
[snip]And if one does not want "health insurance" one pays a "fine" in addition to the above (subject to the same thresholds)?
in the Healthcare package,
Well Alan's reply points out that it depends on whether the amendments are ratified by the senate. The strategy I hear of now is that the senate will keep on proposing amendments, somewhat like a filibuster.
But there's another thing. Severe marriage penalty. In some places single people easily make 150k and would not be affected by the tax, but after they get married they would be. So this might encourage them to stay single and live together, which works in states that don't do common law marriage. There already is a marriage penalty (in the tax brackets, AMT exemption, AMT phaseout threshold, itemized deduction phaseout, exemption phaseout, rental deductible loss, capital gain deductible loss, etc) but this just adds to it.
Does the tax apply to conversion income? The quote below suggests no.
Since the tax applies to individuals, I suppose it applies to S corps as well. Does it apply to C corps as well? Maybe there is a section "APPLICATION TO CORPORATIONS". They have a special rule for S corps and partnerships, which is such a long sentence, but I think means that if the S corp is liquidated, the capital gain from it is not subject to medicare tax -- but I could be reading it wrong.
| Reconciliation Bill (Passed by House) | | Starting in 2013 there is a 3.8% Medicare tax on ALL unearned | income for an individual with income above $200,000 ($250,000 | joint return) or if lesser, the amount that MAGI exceeds the | $200K/$250K threshold.
But what does ALL mean? :)
| `(c) Net Investment Income- For purposes of this chapter-- | | `(1) IN GENERAL- The term `net investment income' | means the excess (if any) of-- | | `(A) the sum of-- | | `(i) gross income from interest, | dividends, annuities, royalties, and rents, other than such | income which is derived in the ordinary course of a trade or | business not described in paragraph (2),
Does "interest" here include (currently) tax-exempt interest as from municpal bonds?
Dan Lanciani ddl@danlan.*com
Probably not, but I welcome an expert opinion.
(A related question is whether tax-exempt income counts towards disqualitying a taxpayer from the health affordability subsidy. Again I think the answer is probably not.)
I also notice that Section 457, public employee deferred compensation, is exempted from investment income for the purposes of the new tax, whereas Section 409A, private-sector deferred compensation is not exempted. This seems like a sweet deal for very-highly-compensated public employees (e.g. state university executives, law and medical professors, city managers...)
Steve
See Section 61 ff. "Gross income includes [everything] ... except those items excluded."
Therefore, items excludible from gross income by a specific statute are not included. State/Muni bonds are excluded by statute.
I haven't see that provision. Therefore, no answer.
very-highly-compensated
OK, but note that this bill introduces a marriage penalty - after we took years eliminating such.
Pension income is excluded. IRA income is excluded. Basically, that leaves commercial annuity income.
I've never seen gross income or net invest income defined to include tax-exempt income. In fact, unless you see somewhere in the Code that tax-exempt income has to be included in some definition of income, it is excluded. E.g., taxability of social security.
Thanks
That's an important point; it's quite a significant marriage penalty.
My point in the above (not that tax law is ever consistent) is the continued inconsistent treatment of public-sector vs. private sector deferred compensation. I don't know of any logic behind this. I believe it has already been the case that 457 money can be rolled over into a qualified plan and 409A money cannot.
Steve
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