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August 2012


by Andrew D. Schwartz, CPA

On June 28th, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act.  Here are some of the tax increases that might affect you starting in 2013:

Increased and Expanded Medicare Taxes

High-income taxpayers will be paying higher Medicare taxes.  Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work.  Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out.  And unlike Social Security taxes which max out at $110,100 (in 2012), there is no cap for Medicare taxes.  Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.

Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62% - from the current rate of 1.45% to 2.35% - on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return.  As of now, the employer match is slated to remain at 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.

For example, if you're single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes  (($500k - $200k) * .9%) for 2013.

For more information, check out the IRS's Questions and Answers for the Additional Medicare Tax, which explains: The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee’s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold.  Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual’s income tax return (Form 1040).

To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income beginning in 2013.  You will pay this tax in addition to any federal and state income taxes due on this income.  We'll provide you a link to this form when it becomes available.

Reduced Tax Breaks for Medical Expenses

Many employers offer their staff the ability to pay for their family's healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package.  Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year.  Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications.  Please note, if you are married, both you and your spouse can put away the full $2,500 through your respective employer's FSA.

The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses.  Starting in 2013, you can only deduct your family's medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income.   That's an increase of one-third over today's threshold of 7.5% of AGI.

This new rule may not impact your taxes, however, thanks to the dreaded AMT.  Since the current threshold for deducting medical expenses under the AMT is already 10% of AGI, many people who are hit by this tax every year might not see any tax increase due to this change.

Steps to Consider to Minimize These Taxes:

As with most other tax rules, there are ways to minimize the tax bite that will be caused by soon to be implemented changes to the Tax Code:

  • Take a look at a Health Savings Account for your family.  Money contributed into an HSA is tax-deductible, and money withdrawn for your family's medical expenses is tax-free.  We wrote about HSAs in our May 2012 Newsletter.

  • Consider selling appreciated investments in 2012 if you would otherwise sell them in 2013.  No one know whether the tax rate on long-term capital gains will be higher than 15% in 2013.  Add to this the 3.8% Medicare tax you'll pay once your income exceeds $200k if single or $250k if married, and you could save a decent amount of taxes by selling by December 31st. 

  • Consider accelerating income into 2012 to reduce your 2013 income.  This strategy includes one-time income generators, such as Roth Conversions.



Many healthcare professionals work based on the Academic Calendar.  That means that a lot of Doctors switch jobs over the summer. According to our friends at the IRS in their IRS Summertime Tax Tip 2012-06:

Summertime is the season that often leads to major life decisions, such as buying a home, moving or a job change. If you are looking for a new job that is in the same line of work, you may be able to deduct some of your job hunting expenses on your federal income tax return.

Here are seven things the IRS wants you to know about deducting costs related to your job search:

  • To qualify for a deduction, your expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
  • You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you received in your gross income, up to the amount of your tax benefit in the earlier year.
  • You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
  • If you travel to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area to which you travelled. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity unrelated to your job search compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
  • You cannot deduct your job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
  • You cannot deduct job search expenses if you are looking for a job for the first time.
  • In order to be deductible, the amount that you spend for job search expenses, combined with other miscellaneous expenses, must exceed a certain threshold. To determine your deduction, use Schedule A, Itemized Deductions. Job search expenses are claimed as a miscellaneous itemized deduction. The amount of your miscellaneous deduction that exceeds two percent of your adjusted gross income is deductible.

For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on or by calling 800-TAX-FORM (800-829-3676).


  • Schedule A, Itemized Deductions ( PDF)
  • Publication 529, Miscellaneous Deductions ( PDF)




Income Taxes

Saving and Investing





  • Returns on extension are no longer due 8/15th.  For 2012, you have until 10/15 to file returns put on extension


  • Consider rolling your old retirement accounts held at a previous employer into your current employer's 401(k) or 403(b) plan to consolidate your finances
  • If your income will be too high for 2012 to contribute to a Roth IRA this year, consider making a non-deductible contribution to an IRA to convert to a Roth before December 31st.


2011 & 2012 TAX FACTS

  • For 2011, the standard deduction for a single individual is $5,800 and for a married couple is $11,600. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2011, the personal exemption is $3,700. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $110,100 for 2012, up from $106,800 for 2011.
  • The standard mileage rate is $.555 per business mile as of July 1, 2011, up from $.51 per mile for the first six months of 2011.
  • The maximum annual salary deferral into a 401(k) plan or a 403(b) plan is $17,000 in 2012, up from $16,500 in 2011.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2012.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2013 to make your 2012 IRA contributions. 


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This Month's Topics

Supreme Court Upholds PPACA, Which Means Tax Increases In Store For 2013

IRS Reminds Taxpayers That Job Search Expenses Can Be Tax Deductible

The FICA Refund for Medical Residents 

2011 & 2012 Tax Facts

Tax and Financial Planning Calendar for August 2012


Browse our index of previous months' newsletter topics

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In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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