Will you be hit with additional taxes due to the ACA?
In 2013 much was made of the impact of new taxes, especially those affecting high income earners, flowing out of the Affordable Care Act to aid in funding insurance coverage for the uninsured. The IRS has recently issued regulations on some of those taxes so finally there is guidance for both employers and employees. Passed into law on January 1, 2013, the Additional Medicare Tax and the Net Investment Income Tax impact those individuals and trusts whose incomes exceed certain threshold amounts. If you are one of those individuals, or serving clients that fall into that category, you need to be aware of and prepared to accommodate these changes. You’ll need to add these line items to your payroll record keeping systems and reports. Penalties for failure to comply are steep and the IRS has signaled that they are not likely to waive them should you request relief.
The new Additional Medicare Tax applies at a rate of .9% to wages, Railroad Retirement Act compensation and self-employment income in excess of threshold amounts based on an individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. The threshold for trusts is a mere $11,950.
If your employer withheld additional amounts to cover the new tax but for some reason you are not subject to the additional taxes – such as you have a loss from a small business in your return that lowers your income — you may only receive a refund upon filing your tax return. Employers generally are not able to refund excess withholding taxes.
Higher Tax Bracket and Loss of Deductions
Additional complications exist for high income earners. A new high tax bracket of 39.6% was adopted in 2013 plus a new 20% capital gain tax rate applies. Thus high income earners face a possibility of being affected by changes in four aspects of the law. To make matters worse if you had a high level of medical expenditures in 2013 and expected to be able to deduct costs now rules provide that only medical expenses that exceed 10% of adjusted gross income will be allowed as a deduction.
If you are affected by these new taxes and tax bracket increases you should look carefully at your 2014 withholding level based on how the changes affected you in 2013. Reviewing your situation and adjusting withholding accordingly early in 2014 will enable you to avoid serious over or under withholding for the year. Remember that a large amount of under-withheld tax also brings with it the possibility of a steep penalty.
Doug Kennedy is a senior member of the International Practice group and serves numerous foreign companies as they set up U.S. operations and U.S companies as they set up foreign operations. He advises on the topics of payroll, taxation, and general areas of governmental compliance.
If you would like to speak with Doug, please use the Comments section to make a request.