New taxes for high earners

Congress passed two new tax laws, one in 2010 and one at the beginning of this year, that both contain provisions to increase income taxes on higher income taxpayers starting in 2013. The 2012 American Taxpayer Relief Act (relief? really?) increases tax rates on earned income and capital gains, reduces personal exemptions, and reduces itemized deductions. The 2010 Health Care Reform Act (sometimes referred to as Obamacare) adds a surtax on investment income and increases the Medicare earned income tax. Here is how they work:

1. Long-term capital gains. For single taxpayers with taxable income of more than $400,000 ($450,000 if filing married filing jointly (MFJ), the tax rate on long-term capital gains increases from 15 percent to 20 percent.

2. Qualified dividends. Same tax treatment as long-term capital gains.

3. Income tax bracket. Taxpayers with taxable income above $400,000 if filing as single (or $450,000 if filing as MFJ) will see their top tax bracket increase from 35 percent to 39.6 percent.

4. Itemized deduction phase-out. Taxpayers with adjusted gross income (AGI) above $250,000 if filing single (or $300,000 if filing MFJ) will have to reduce their otherwise allowable itemized deductions by 3 percent of the amount by which the AGI exceeds the $250,000 or $300,000 threshold.

5. Personal exemption phase-out. Taxpayers with AGI above $250,000 if filing single (or $300,000 if filing MFJ) will lose 2 percent of their personal exemption for every $2,500 of income in excess of the threshold amounts. The personal exemption amount in 2013 is $3,900.

6. Medicare earned income tax. Wage earners pay a 1.45 percent Medicare tax on all their earned income and self-employed individuals pay 2.9 percent. Unlike the Social Security tax, which is capped at $113,700 of earnings in 2013, the Medicare tax applies to all earned income. Starting this year, workers with AGIs above $200,000 if filing single (or $250,000 if filing MFJ) will pay an additional 0.9 percent Medicare tax on earned income above $200,000 if filing single (or $250,000 if filing MFJ).

7. Medicare investment income tax. This new tax adds a 3.8 percent additional tax to all investment income for taxpayers with modified adjusted gross incomes (MAGI) above $200,000 if filing single (or $250,000 if filing MFJ). Investment income includes taxable interest, dividends, capital gains, most rent and royalty income, and income from nonqualified annuities.

If any of these new taxes apply to you, you should do some tax planning now to avoid a big surprise next spring when tax time rolls around. I suspect that the majority of higher income individuals are simply not aware of just how much bigger Uncle Sam's bite will be.