Portions of the Patient Protection and Affordable Care Act, otherwise known as Obamacare, went into effect January 1, 2013 and along with it, tax reform. As part of the law, a 3.8 percent Medicare tax increase will be added to Net Investment Income. The calculation is determined by the lesser of: A) Net Investment Income, or B) the excess of Modified Adjusted Gross Income (MAGI) over certain limits. An individual or family must have both net investment income and MAGI for the new tax to apply. In addition, there will be a 0.9 percent increase in Medicare tax on employee wages.
Utilizing tax deferred strategies can help decrease, and may even eliminate, your exposure to the new tax laws. This includes maximizing qualified plan contributions; converting traditional IRA’s to Roth IRAs, and taking advantage of other tax deferred investments. This can allow more control over the timing of your income and exposure to taxation.
The combination of Obamacare and the expiration of George W. Bush-era tax cuts make financial planning for 2013 essential in reducing unnecessary tax liability. This could mean the difference in paying over 43 percent opposed to the current maximum capital gains rate of 15 percent.
New legislation along with the continuous battle in Congress over deficit reduction, national debt, and the fiscal cliff makes asset allocation and tax deferred investing an important part in portfolio constructing. You never can be sure what the future holds, that’s why planning ahead will help you navigate the uncertain and volatile economic climate.