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In some respects you should want your taxes to go up next year and every year if it reflects higher income. As a rule of thumb, for every dollar your federal income tax goes up your income will have gone up three to four dollars. To quote Jimmy Fallon in a currently running TV commercial, who wouldn’t want more money? But it is frustrating (to understate it) when your taxes go up without an increase in your income. That is the fate that will befall many next year as the revenue raising portion of the Health Care Act kicks in…but there are ways to mitigate it.
Whatever other changes Congress has up its sleeve in either direction (which means even more in a Presidential election year) we know that 2013 will begin with two additional tax raisers. There is the additional 3.8% surtax on certain types of investment income and gains (Code section 1411), and the additional .9% Medicare tax for certain earned income (not to mention the excise tax on those without health insurance and on those with too much health insurance…I mean that…I am not mentioning these in this article). If you wish to view this tax as rational, then the way to explain it is to see it as a way to increase the Medicare contribution made by some higher income taxpayers by either subjecting investment income (i.e. income on capital), currently not subject to the Medicare portion of FICA, to that tax or by increasing the existing Medicare tax on earned income (i.e. income from labor) for those same taxpayers. ADDITIONAL INVESTMENT INCOME TAX There are three concepts you need to get a handle on. · The first concept is “Modified Adjusted Gross Income” or MAGI for short, although this is one MAGI that bears no gifts. For the most part this really just means adjusted gross income; the modification to which it refers relates only to those American taxpayers working overseas who are permitted to exclude from income up to $92,900 (as of 2011). For those working overseas taking this exclusion a portion is added to AGI; for those not working overseas MAGI is just your AGI.
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David S. Neufeld, Shareholder, Flaster Greenberg PC
1810 Chapel Avenue West | Cherry Hill, NJ 08002 856.382.2257 | david.neufeld@flastergreenberg.com Internationally Recognized Tax and Estate Planning Attorney |