This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

2 Obamacare Taxes Hitting High-Income Earners

NEW YORK (TheStreet) -- The Patient Protection and Affordable Care Act (PPACA) became law back in March 2010. Various provisions of the law go into effect over the next several years. The Supreme Court during 2012 decided not to strike down the law so it largely moves forward as written with a few exceptions. The PPACA includes two new taxes which become effective in 2013. It is critical for those defined as high earners to understand how these new taxes work and the strategies available to minimize their impact.

The first new tax is an incremental 0.9% Medicare tax on wages above $250,000 (married filing joint) and $200,000 (single). A married couple with $500,000 in wages in 2013 will owe an incremental $2,250 in taxes or simply $250,000 x.9%. This new tax is applied to gross wages and is before deductions for items like 401(k) contributions and healthcare premiums. It should be noted the tax also applies to self employment income earned by sole proprietors and partnerships as well.

This first tax will be hard to avoid as it is simply a function of wages or self employment income. The only way to avoid it is to structure compensation to stay below the $250,000 or $200,000 level.

The second new tax related to Obamacare is the "unearned income" tax. Married couples filing jointly with modified adjusted gross income (MAGI) above $250,000 are subject to this new tax. For single individuals this tax kicks in for MAGI above $200,000. So how does this second tax work? A married couple will pay the lower of 3.8% of:

1) excess MAGI above $250k or 2) unearned income.

For example, a married couple with a MAGI of $280,000 and unearned income of $15,000 would owe $570. The calculation works as follows:

Lower of:

Excess MAGI $30,000 x 3.8% = $1,140

Unearned income $15,000 x 3.8% = $250

What is considered unearned income? Unearned income is very broad and includes: taxable interest, dividends, net capital gains, annuities, rents (non-trade/business), and royalties. Luckily, tax planning does exist for this second tax.

The first strategy is to use tax exempt municipals since muni interest is not considered unearned income. A second possible strategy is to use what is known in the financial planning industry as "asset location," strategically dividing assets between taxable and tax-deferred accounts (401k, IRA, Roth IRA) in a way that maximizes after-tax returns. For example, placing an asset class like taxable corporate bonds inside a tax deferred account is more tax efficient. Likewise, a small cap stock fund that pays no dividend makes sense in a taxable account. The goal of asset location is to reduce unearned income where possible. Remember, the lower the unearned income the lower the tax bite!

One other potential planning opportunity involves Roth conversions. While IRA required minimum distributions are not considered unearned income they are considered part of MAGI. Roth IRA distributions are not considered unearned income or MAGI.

I would caution each strategy needs to be evaluated to a person's circumstances. Also, it is important to remember taxes are but one part of the overall situation and the tax tail should not wag the dog. Plan now for these 2013 taxes it might just save you some money!

More on taxes:

Yes, it's tax deductible, but...

How to A letter from the IRS? Uh-oh. But don't panic.

Uncle Sam wants to help you pay for college

--By Michael Maye

Michael Maye is the founder and president of MJM Financial Advisors (www.mjmfinadv.com), a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.

Follow TheStreet on Twitter and become a fan on Facebook.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,119.82 +68.09 0.40%
S&P 500 1,984.72 +11.09 0.56%
NASDAQ 4,459.7380 +35.0340 0.79%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs