By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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Tax rules have generally remained unchanged, which is a good thing given rates are historically low. However, even though the tax rules haven’t changed, that doesn’t mean you may not be impacted by higher taxes. Below are two areas that might require your attention.
Affordable Care Act Taxes. The 0.9% Medicare Health Insurance Surtax and the 3.8% Net Investment Income taxes remain for individuals earning more than $200,000 and married couples earning more than $250,000. The 0.9% surtax is levied on earned income, and the 3.8% Net Investment Income Tax applies to passive earnings like interest, dividends, capital gains, etc. Importantly, the $200,000/$250,000 thresholds are not indexed for inflation.
Consequently, if your income is higher now than in previous years, you may be subject to these taxes. Moreover, for the 0.9% surtax on earned income, employers are not required to withhold for this tax until you meet the applicable threshold from the employer’s payroll. If you have multiple income sources that collectively push you past the thresholds, or if you are married and you and your spouse’s income collectively pushes you over the $250,000 threshold, it is possible that none of your employers will withhold for this liability, and you will owe the tax when filing your return.
State and Local Taxes (SALT). Also relevant for high earners is the ongoing cap on deducting state and local taxes (“SALT”). SALT (which generally includes state income tax, real estate/property tax, state sales tax, etc.) and the corresponding income tax deduction remains capped at $10,000, regardless of whether you are a single or married taxpayer. Most miscellaneous itemized deductions have also been eliminated, along with the loss of personal exemptions. As such, some taxpayers may face higher taxes due to these limitations.
If your situation exposes you to these extra taxes or to the loss of significant deductions, be sure to review your withholding elections and your investment portfolio decisions. Work with your tax advisors and your financial advisor to address these important decisions.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.