The ACA Changes for High-Income Households
Additional Medicare Tax on Wages and Compensation: For tax years beginning after December 31, 2012, if you earn more than $200,000 ($250,000 if Married filing Jointly) in wages, compensation, and self-employment income, a 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. You may need to include this amount when figuring your estimated tax.
Net Investment Income Tax (NIIT). For tax years beginning after December 31, 2012, you may be subject to Net Investment Income Tax (NIIT), if your modified adjusted gross income is $200,000 or more ($250,000 if filing jointly, or $125,000 if married filing separately) . NIIT is a 3.8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. NIIT include incomes from interest, dividends, capital gains, rental and royalty income, and certain other investment income and reduce your investment expenses. Nonresident alien are not subject to the additional 3.8% tax.
New Higher Income Tax Rate: If your taxable income is more than $400,000 ($450,000 if filing jointly, or $425,000 if head of household, or$225,000 if married filing separately), your new tax bracket is 39.6% up from 35%. If you are in the new higher income tax bracket, your new tax rate on capital gains and dividends is 20% – up from 15%.
Limitation on Itemized Deductions: If you have a high adjusted gross income, you may not be able to take all your itemized deductions, thanks to the Pease provision. Itemized deductions start to phase out at $254,200 ($305,050 if filing jointly, $279,650 if head of household, or $152,525 if you are married filing separately). Your itemized deductions are reduced by 3% of your adjusted gross income over these amounts, but they are never reduced by more than 80% of your otherwise allowable deductions.
Personal Exemption Phase out (PEP): Your personal exemptions for yourself, your spouse, and your dependents reduce your taxable income by $3,950 each. If your adjusted gross income is over $254,200 ($305,050 if filing jointly, $279,650 for head of household, or $152,525 if you are married filing separately), your personal exemptions are reduced by 2% for each $2,500 or portion over these amounts. The exemption phases out completely at $376,700 ($427,550 if filing jointly, $213,775 if filing separately, $42,150 if filing as head of household.) (….Continued)