For Our Clients

Educational Resources

By Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning Strategies

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The vast majority of tax rules haven’t changed, which is generally a good thing given rates are historically low. However, just because 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 that went into effect in 2013 are not indexed for inflation. 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 also applies to passive earnings like interest, dividends, capital gains, etc.

Consequently, if your income is higher now than in previous years, you may be subject to these taxes. Moreover, for the .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, it is possible that none of your employers will withhold for this liability.

State and Local Taxes (SALT).  Also relevant for any high earners is the ongoing cap on deducting state and local taxes. SALT (which generally includes state income tax, real estate/property tax, state sales tax, etc.) and the corresponding income tax deduction is 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.

While there’s no pending tax law changes at the moment, the new administration has identified those who earn more than $400,000 or more as a target for increased taxes as well. 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. Be sure to work with your tax advisors and your financial advisor to address these important decisions.

 

March 30, 2021 |