Two tax hikes that will apply in 2013

As the stalemate on taxes continues between President Obama and Speaker Boehner... Look at two tax hikes that will apply in 2013, regardless of the outcome of the current negotiations. IRS has issued guidance on these Medicare surtaxes for upper-incomers...a 3.8% tax on unearned income and a 0.9% levy imposed on their earned income. Start with the 3.8% Medicare surtax. It applies to unearned income of single filers with modified adjusted gross incomes above $200,000 and of couples over $250,000. Marrieds filing separately get a $125,000 threshold. Modified AGI is AGI plus any tax free foreign earned income. The surtax is levied on the smaller of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, payments of substitute interest and dividends by brokers, capital gains, annuities, royalties and passive rental income. Tax free interest is exempted, along with payouts from retirement plans such as 401(k)s, IRAs, deferred-pay plans and pension plans. Most gain on the sale of a primary residence is exempt from the surtax. Only profit in excess of the $250,000 exclusion for singles or $500,000 for couples can be hit by the surtax. But the levy can apply to all gain on a second home. Income from a passive activity is subject to the surtax if the recipient doesn’t materially participate in the operations, even if the income is from a business. Filers with several passive activities get a onetime chance to regroup them to blunt the surtax’s impact. This will help real estate pros with net rental income. They can regroup their operations so their rental income is exempt from the surtax. To qualify as a real estate pro, you must spend more than half of your working hours and 750 or more hours a year materially involved in realty as a developer, broker, etc. Investment expenses can reduce income that is subject to the surtax. You can deduct these costs from your investment income: Rental and royalty expenses. Margin interest, generally to the extent of income from interest and short-term gains. Investment advice and broker fees. State income tax attributable to investment income. Trusts and estates can be hit by the surtax as well. It will apply if the trust or estate has AGI of more than $11,950 and undistributed net investment income. Now turn to the 0.9% Medicare surtax on earned income...wages and income from self-employment. Singles will owe the levy once total earnings exceed $200,000. Couples…over $250,000. Marrieds filing separately...over $125,000. So for earnings over the thresholds, the effective Medicare tax rate will be 3.8%...the usual 2.9% rate plus an extra 0.9%. The surtax applies only to the employee’s share of Medicare tax. Employers don’t owe it. Employers will withhold the surtax once an employee’s wages exceed $200,000. Employees will then calculate the actual tax due on their 1040s. So marrieds who each make below the $200,000 threshold but expect their total wages to top $250,000 in 2013 should consider having more income tax withheld on their pay.