Increase in Taxes Due to New Healthcare Law

Wage-earners in the top 1% of taxpayers (annual earnings of $624,000 or higher) will pay for 85% of two increases in Medicare taxes found in the new healthcare law. The most onerous provisions as well as some strategies to lessen the blow are below:

Tax on Investment Income. A new 3.8% Medicare tax will be applied to investment income once the investor’s AGI surpasses $250,000 (or $200,000 for singles).  What you can do:

• Raise your cost basis in your investment assets by selling investments with sizable capital gains before the new tax takes effect in 2013, then buying it back. When you sell the assets in the future, you’ll have fewer gains subject to the 3.8% tax.
• Consider purchasing municipal bonds (their interest will remain tax-free under the new law). 
• Convert your IRA to a Roth IRA to prevent the minimum distributions from pushing you over the $250,000 threshold.

Trust Taxes. The same Medicare tax will be applied to trust income that exceeds $11,200.  What you can do: 

• Have the investment income paid out to a beneficiary regularly. Only investment income that remains inside the trust is subject to the new tax.

Tax on Wages. In addition to the current 1.45%, a new 0.9% Medicare tax will be applied to wages exceeding $250,000 (or $200,000 for singles). What you can do:

• If you’re expecting a bonus in 2013, try to have it accelerated to 2012.
• Overfund a whole-life insurance policy, and then take out loans. The loans are not included in your AGI.

“When it comes to health care, there’s nothing like some vigilant wealth care.”

Karen Hube, Fending Off Health Taxes, Barron’s Penta, May 22, 2010. 

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.