Just like fresh snow falling, at the start of the new year one can expect a "fresh new tax law" to settle upon our financial landscape.
One of those "fresh new tax laws" that has been greatly misunderstood is the provision in "Obamacare" for taxing the "rich" to "pay their fair share" of the costs for providing "free healthcare" to the poor and downtrodden.
How the law defines a person who appears to be one of those "rich" folk is, as usual, convoluted.
One of the important things to remember is the threshold when one must first begin to worry if this tax will hit - $200,000 for single folks and $250,000 for married couples. (If you didn't notice, this means that two single folks living together can have combined incomes of $400,000 and not pay this tax increase, but if two folks earning $400,000 are married they will pay the tax.)
The tax is imposed on "investment income". Actually, it is a 3.8 percent tax on the lesser of the taxpayer's net "investment income" (defined below), or any excess of Modified Adjusted Gross Income (we'll call it "MAGI" from now on) over the thresholds mentioned above.
"Investment income" is defined as: gross income from interest, dividends, annuities, royalties and non-business rents; net gain from the sale of investment property (non-business property only); or any other gain from a passive trade or business (limited partnership interests, etc.)
Here's an example: John and Jane, married filing joint, have MAGI of $400,000 in 2013. This includes $300,000 of "investment income" (which came from selling inherited stock, which they want to use to buy a house). Note that their MAGI is $150,000 over the $250,000 threshold for married folks. Thus, choosing the "lesser" of the excess of MAGI over the threshold, they pay 3.8 percent tax on $150,000 of their "investment income". ($5,700 in tax) The sad thing is that if John and Jane weren't married, they wouldn't have had to pay any tax.
But wait, there's more! (Sounds like one of those infomercials doesn't it?)
There is an increase in Medicare Tax withheld from wages starting in 2013. It uses the same thresholds as above, only this is on wages, not "investment income". The rate is 0.9 percent.
It's important to remember that this additional Medicare Tax of 0.9 percent does NOT apply to wages below the threshold amounts. This is another tax only on the "rich" as our president likes to call them.
The old farmer says, "Lettin' the cat outta the bag is a whole lot easier than puttin' it back in."
• Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459.