The United States Treasury Department and the Internal Revenue Service (IRS) have issued two further proposed regulations on taxes - the Net Investment Income Tax and the Additional Medicare Tax - that will be imposed in 2013 as a result of President Barack Obama’s Affordable Care Act (ACA) of 2010.
The 3.8% Net Investment Tax will be imposed against individuals, estates and trusts on their investment income, and the 0.9% Additional Medicare Tax applies to an individual’s wages and self-employment income, that exceed threshold amounts.
The two new taxes are two of the ACA’s 47 tax or tax-related provisions, some of which are already in effect. Other provisions include individual mandate and employer mandate taxes, restrictions on the use of Flexible Spending Arrangements and Health Savings Accounts, the new tax on medical devices, the health insurance premium subsidy and new requirements for tax-exempt hospitals and group health insurance plans.
The IRS has confirmed that the Net Investment Income Tax, or Medicare contribution tax, will apply to individuals, estates and trusts that have investment income above certain threshold amounts, from January 1, 2013.
The threshold amount for individuals is USD250,000 for married taxpayers filing jointly, USD125,000 for married taxpayers filing separately, and USD200,000 for single taxpayers, and will not be indexed for inflation. The tax will not affect income tax returns for the 2012 taxable year that will be filed in 2013, and will not be payable by non-resident aliens.
Estates and trusts will be subject to the Net Investment Income Tax if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for the taxable year. For tax year 2012, the threshold amount was USD11,650. There are special rules for certain types of trusts, such as charitable remainder trusts and small business trusts.
In general, investment income includes, but is not limited to, interest, dividends, net capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in the trading of financial instruments or commodities, reduced by certain expenses allocable to that income.
The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.
With regard to married and single individual taxpayers, the Additional Medicare Tax’s threshold amounts are the same as for the Net Investment Income Tax. However, an employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee, if that individual has a wage in excess ofUSD200,000 in a calendar year.
Calculating wages for the purposes of withholding Additional Medicare Tax is no different than calculating wages for federal income tax generally, and the proposed regulations provide guidance for employers and individuals relating to implementation of the new tax, including the requirement to withhold it, the requirement to file a reporting return, the employer process for adjusting any underpayments and overpayments, and the employer and employee processes for filing a claim for refund.
The IRS has stated that it intends to finalize both of the regulations in 2013 and that taxpayers may rely on these proposed regulations for tax periods beginning before the date that the final regulations are published..
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