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MONTHLY TAX NEWSLETTERMarch 2014
Recently, I met with two married physicians who each earn a high salary. Sadly, due to the nature of medicine, their combined 2013 income decreased by $55k from what they earned during 2012. Even so, their 2013 federal tax liability increased by $19k over the taxes they paid for 2012.
Let me repeat this fact. Even though this couple's income fell by $55k from 2012 to 2013, their federal taxes jumped by $19k! What caused this $39k swing in their federal income taxes - an increase of $19k instead of a decrease of $20k as one would reasonably expect based on a $55k drop in income?
Increased Top Tax Rate (Cost = $19.5k):
The top tax bracket is now 39.6%, up 13% from the previous top rate of 35%, and affects married couples with taxable income over $450k and single individuals with taxable income exceeding $400k. The 4.6% rate increase to the top tax bracket cost this couple $19.5k in additional federal income taxes last year.
Phase-out of Itemized Deductions (Cost = $8k)
2013 saw the return of the phase-out of itemized deductions. Married couples earning more than $300k and single individuals earning more than $250k now reduce their itemized deduction by 3% of the amount that their adjusted gross income (AGI) exceeds the applicable threshold. At this couple's level of income, the phase-out of their itemized deductions cost them $8k in additional federal income taxes.
Phase-Out of Personal Exemptions (Cost = $4.5k):
2013 also saw the return of the phase-out of the personal exemption. Married couples earning more than $300k and single individuals earning more than $250k begin to lose out on the personal exemption of $3,900 for themselves, their spouse, their children, and their other allowable dependents. At the top rate of 39.6%, the cost of not claiming this tax break is $1,550 per exemption. With one child plus themselves, this client paid an extra $4,650 in 2013 federal income taxes due to the full phase-out of their personal exemptions.
New .9% Medicare Tax on Wages ($6.5k):
2013 is the first year that taxpayers are subject to an additional Medicare on salaries. For married couples, the threshold is total Medicare wages (box 5 of all of your W-2 forms) for both spouses over $250k. For single individuals, the threshold is $200k. At a rate of .9%, this new Medicare tax cost this client $6.5k last year.
New 3.8% Medicare Tax on Investment Income ($200):
2013 is also the first year of paying a Medicare Tax on investment income. Married couples earning more than $250k and single individuals earning more than $200k are now subject to this new Medicare Tax at a rate 3.8% on their net investment income. Make sure to include your interest, dividends, capital gains, annuities, royalties, and net rental income when calculating this new tax. Thanks to receiving interest on their FICA refund, these clients reported $4,500 in investment income for 2013 which added $200 to their already hefty tax bill.
More information about these tax hikes as well as strategies to help minimize the impact of these new taxes, is available in our article: The New American Taxpayer Relief Act: How Much Relief is in it for You? included in our February 2013 newsletter
Ever since the 2001 Tax Act was enacted, the Alternative Minimum Tax (AMT) increased the federal tax burden for many middle-income and high-income taxpayers. Remember, each year, you need to calculate your taxes two different ways - the regular way, and then again under the AMT rules. Whichever tax is higher is the tax you pay.
Based on our database of clients, more than half of our married couples who file joint returns end up paying the AMT each year. Plus, married couples who paid the AMT paid an amount equal to 2.2% of their taxable income for this secondary tax. For single individuals hit by the AMT, they ended up paying a federal tax premium equal to 1.8% of their taxable income.
The Raw Data
To prepare for an article written a few years back, I researched the AMT paid by my firm's individual tax clients per their 2009 federal income tax returns. Here is what I learned from that data:
Due to a variety of factors, the AMT affects the majority of tax returns prepared for my firm's married clients.
Based on the 2009 tax returns prepared by my office, the AMT does not seem to affect Single Taxpayers nearly as much as Married Couples.
For our other clients, 100% of our Head of Household clients with AGI in excess of $135k and 100% of our Married Filing Separately clients with AGI in excess of $100k paid the AMT in 2009.
The Silver Lining
The very unpopular AMT might actually absorb the impact of many of the 2013 tax hikes for many taxpayers who typically pay the AMT each year. Remember, anyone paying the AMT will not see any increase in their federal tax liability due to the 4.6% top rate increase until their AMT liability is fully offset by higher federal taxes. Plus, the phase-out of the itemized deduction is reversed in the AMT calculation, and the phase-out of the personal exemptions are irrelevant since personal exemptions are excluded from this secondary tax calculation.
For that reason, until the full amount of the Alternative Minimum Tax you paid in 2012 is absorbed, your federal tax liability (excluding the new Medicare taxes and higher self-employment taxes) should not increase in 2013. Who ever thought that the dreaded AMT would end up providing relief to so many taxpayers?
Our friends at Barton Associates, the Locum Tenens Experts, wanted to compile a tax guide to provide their contractors with a summary of the basic tax rules affecting them. Founded in 2001, Barton Associates is a leading locum tenens staffing company serving physicians, nurse practitioners, and hospitals, medical practices and companies throughout the United States.
Back in the fall, Barton Associates reached out to us through our MDTAXES website to see if they could use information posted in some of our articles over the years as a foundation for their guide. Well, to be completely honest, the team at Barton Associates put together a terrific eight page tax guide for self-employed healthcare professionals that covers the following topics:
I strongly recommend that any healthcare professional who earns income as an independent contractor take the time to download and read this tax guide. The information is well written and very easy to understand.
Below are links to access Barton Associates' Tax Guide:
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