Recent changes affecting higher income earners

  • Single filer: Pays additional 0.9% Medicare surcharge (health insurance tax) on wages and self-employment income in excess of $200,000. Pays additional 3.8% net investment income tax on certain income (e.g., capital gains, interest and dividend income) if modified adjusted gross income (MAGI) exceeds $200,000.  Sees itemized deductions and personal exemptions limited or completely phased out if AGI exceeds $259,400.
  • Married filing jointly: Pays additional 0.9% Medicare surcharge (health insurance tax) on wages and self employment incomein excess of $250,000.Pays additional 3.8% net investment income tax on certain income if MAGI exceeds $250,000. Sees itemized deductions and personal and dependency exemptions limited or completely phased out if AGI exceeds $311,300,  Important to check: For the 0.9% additional Medicare surtax, withholding is required only on wages above $200,000. If a couple’s combined income exceeds $250,000, no Medicare surtax withholding may have taken place if each spouse earned below $200,000. This may result in an under withholding (and possible penalties). Ask us whether you should pay estimates.
  • Married Filing Separately:  Pays additional 0.9% Medicare surcharge (health insurance tax) on wages and self-employment income in excess of $125,000.  Pays additional 3.8% net investment income tax on certain income if MAGI exceeds $125,000.  Sees itemized deductions and personal and dependency exemptions limited or completely phased out if AGI exceeds $155,650
  • Head of Household   Pays additional 0.9% Medicare surcharge (health insurance tax) on wages and self-employment income in excess of $200,000.  Pays additional 3.8% net investment income tax on certain income if MAGI exceeds $200,000.  Sees itemized deductions and personal and dependency exemptions limited or completely phased out if AGI exceeds $285,350. 

    federal Tax rates

    • Income Tax: Most rates stayed the same — highest-income taxpayers [$415,050 (single) to $466,950 (joint filers)] pay 39.6%. The amount of estate income excluded from federal estate tax rose to $5.45 million.
      • Capital Gains Tax:
        • 10% or 15% tax bracket: No tax
        • 25%, 28%, 33% or 35% brackets: 15%
        • 39.6% tax bracket: 20%
        • Estate Tax: 40%
           
    • LOOKING FORWARD: WHAT CAN YOU DO TO MINIMIZE TAXES? It’s never too early to start planning ways to save on taxes next year. For example, you can:
      • Maximize your retirement plan contributions to minimize income($18,000 is the limit for 401(k)s if you are under age 50, $24,000 if over),
      • Take full advantage of employer-sponsored programs that allow you to set aside pre-tax dollars for transit or medical expenses.
      • Call us to ask whether you will likely be subject to the AMT and how to minimize the impact.
      • Shift to investments that are not subject to the 3.8% net investment income tax (e.g., exempt bonds).
      • Offset any capital gains by harvesting losses in your taxable brokerage account.
    • Affordable Care Act
      • New rules for reporting health insurance coverage to the IRS are in effect and penalties for failing to do so can be steep. Information returns for tax year 2016 are due May 31; June 30 if filed electronically.
      • The Small Business Health Care Tax Credit,  which is 50% for small employers and 35% forsmall tax-exempt employers may help offset costs but is subject to several restrictions. It can beclaimed only:
        • If the employer has fewer than 25 full-time equivalent employees
        • If the employer pays more than 50% of employees’ premium costs.
        • For two consecutive years.
      • Remember, employers can no longer use health reimbursement arrangements (HRAs) except for certain benefits such as dental and vision care.

    TAX BENEFITS AND OBLIGATIONS

    • While a few tax benefits are still temporary, most are permanent, except for the tuition and fees deduction, which expires this year. They are also subject to income limits. For example, the student loan interest deduction stops being available once a taxpayer filing as single reports $80,000 MAGI.
    • Child and Dependent Care Costs
      • Child and Dependent Care Tax Credit — Provides 20–35% for paid care for children under 13, or a spouse or other dependent, who is incapable o f self-care.
      • Child Tax Credit — Provides up to $1,000 per child under 17 (including, but not limited to, son, daughter, stepchild and foster child).

    HEALTH CARE AND TAXES — KEY FACTS FOR INDIVIDUALS AND FAMILIES 

    • Under the Patient Protection and Affordable Care Act (ACA):
      • If you did not have qualifying coverage for yourself or any dependents for any portion of 2016, and do not qualify for an exemption, you will be subject to a penalty when you file your federal income tax return in 2017 ($695 per uninsured adult or 2.5% of household income),
      • Individuals who are within certain income limits qualify for a premium tax credit if they purchase insurance through approved market exchanges.
      • Taxpayers under 65 years old can deduct only unreimbursed medical/dental expenses that exceed 10% of adjusted gross income (7.5% through 2016 for those age 65 or older).
    • DON’T FORGET FSAs!  One way to reduce your taxable income is to make pre-tax contributions to a flexible spending account to pay out-of-pocket medical expenses. You may be surprised to learn the costs that FSAs may cover, such as taxi fare for a medical appointment.

    LOOKING FORWARD: WHAT CAN YOU DO TO MINIMIZE TAXES? 

    • It’s never too early to start planning ways to save on taxes next year. For example, you can:
      • Maximize your retirement plan contributions to minimize income($18,000 is the limit for 401(k)s if you are under age 50, $24,000 if over),
      • Take full advantage of employer-sponsored programs that allow you to set aside pre-tax dollars for transit or medical expenses.
      • Call us to ask whether you will likely be subject to the AMT and how to minimize the impact.
      • Shift to investments that are not subject to the 3.8% net investment income tax (e.g., exempt bonds).
      • Offset any capital gains by harvesting losses in your taxable brokerage account.
    • Affordable Care Act
      • New rules for reporting health insurance coverage to the IRS are in effect and penalties for failing to do so can be steep. Information returns for tax year 2016are due May 31; June 30 if filed electronically.
      • The Small Business Health Care Tax Credit,  which is 50% for small employers and 35% forsmall tax-exempt employers may help offset costs but is subject to several restrictions. It can beclaimed only:
        • If the employer has fewer than 25 full-time equivalent employees
        • If the employer pays more than 50% of employees’ premium costs.
        • For two consecutive years.
      • Remember, employers can no longer use health reimbursement arrangements (HRAs) except for certain benefits such as dental and vision care.