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New Tax Increase for Wealthy Americans: Will You Pay More?

Written by Eva Rosenberg on August 18, 2010 in Tax  |   2 comments

New Tax Increase for Wealthy Americans: Will You Pay More? In March, Congress passed landmark legislation that will affect taxpayers in good ways and bad. It’s called the Health Care and Education Affordability Reconciliation Act of 2010. You’ve heard talk about the benefits for folks…

Tax increases for Wealthy AmericansNew Tax Increase for Wealthy Americans: Will You Pay More?

In March, Congress passed landmark legislation that will affect taxpayers in good ways and bad. It’s called the Health Care and Education Affordability Reconciliation Act of 2010. You’ve heard talk about the benefits for folks with average and lower incomes.

But what about the wealthy? Tax returns for Americans making over $200,000 a year (in adjusted gross income) account for over 3 percent of all tax returns filed in 2007 (the most recent year of IRS statistics).

Will you have a new tax increase?

Perhaps. The following two new taxes take effect in 2013. The law could be changed at least twice by then.

Meet the new Hospital Insurance Tax: a 0.9 percent tax on the wages of individuals whose earned income is over $200,000 ($250,000 for couples filing jointly). “Earned income” means wages or profits from your Schedule C businesses and self-employment income from partnerships.

Lest you feel discouraged from working and instead want to kick back and build up your investments, beware. There’s a sister tax, the 3.8 percent Medicare tax. That is imposed on unearned income-investments, passive income, capital gains, etc. This affects modified adjusted gross income of $200,000 for singles, $250,000 for couples filing jointly, and $125,000 for couples filing separately. This tax will be imposed as well on trusts with undistributed income of about $12,000, so trusts aren’t a solution.

What’s excluded from both these new taxes? Retirement income (taxable draws from IRAs, pension plans, and the like) and tax-exempt trusts, like charitable remainder trusts.

The bad news? If you end up facing these additional taxes, no amount of itemized deductions will help you avoid them.

New Tax Planning Ideas

Reduce earned income by maximizing your participation in flexible spending plans that cover health-care costs, child-care costs, and education expenses. Increase your contributions to your retirement accounts as high as you can. Better yet, if you are in a position to elect Roth IRA treatment for part of your pension contributions, take advantage of that option. In the long run, this will reduce your tax impact.

This strategy will help about 70 percent of people affected by the tax. Everyone else’s income will be too high for this to make even a minute difference.

Will it help to convert your retirement accounts to a Roth IRA? It won’t make a difference, since income from IRAs and pension plans isn’t hit by these two taxes.

Well-planned investments in real estate and oil can generate lots of passive losses through depreciation and depletion while generating substantial cash flow. Your passive loss deductions will be suspended in the early years but will be deductible once the investments generate taxable income. Meanwhile, none of the cash flow will be taxed.

The Wall Street Journal suggests you buy life insurance and borrow against it. That’s one way to spend lots of money, give your heirs tax-free income, and still get enough cash back to live on.

It’s time to learn to maximize your investment growth in Roth accounts. Learn more about self-directed Roth IRAs and investing in intangibles, like royalties, copyrights, etc., that bring in a solid stream of income instead of traditional stocks and bonds. Ultimately, the more money you can convert to tax-free income when you draw it, the less you will be affected by any income taxes.

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.

Read More:

Self-Employed? Here’s What You Need To Know About Estimated Payments

Write-Off Your Child’s Summer Camp

Can’t Pay Your Tax Bill? Here’s How To Deal With The IRS

8 Tax Benefits For Savers

2 comments

  1. Charo says:

    this is crazy. Why else would we work so hard. This is making american people lazy….

  2. AviationInstruction says:

    First of all the tactics of taxing the "Rich" and maintaining taxes for the lower income classes will only deprive the lower income general public. If I was a business man (I'm not going to be rich working for someone else and if I was working for an employer I would be high enough up on the ladder that I could counter the increase) the first thing I would do would be to increase my product prices, cut my employees pay and cut there hours so that I can make Net the same income. I work in the gaming industry and have come close to the business men who run these casinos to know how business works. Ultimately this is just another attempt to rob the American people of there power to control our government. This will continue until we throw up our hands and give up or until we stand up and become proactive to shut these worthless federal offices down. The only way we can get out of this financial hell hole is to cut our Fed down to strictly Foreign defense. Being that 98-99% of our tax dollars is spent to process 1-2% we are better off to save our money and invest our taxes locally. All we are doing is wasting our energy and efforts to keep those in power, powerful. This has nothing to do with what is right nor best for Americans. This has nothing to do with fixing the economy but keeping a low economy rendering us helpless. Perhaps we should start paying our Fed officials at the federal minimum wage and outlaw side barters; Restrict each bills to one subject limiting one bill to one law. On top of all this we need to throw out any bill that can't be read in two hours at an average speed with a 98% comprehension of those in the 12th grade. That any bill propose outside these guidelines should be thrown out and a heavy fine to the pension of those who propose the bill.


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