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Every single year there are updates in the tax law. In 2013 the IRS Tax Code was 73,954 pages long and had almost 1,000 forms! Tax code complexity and changes are nothing new and both are big reasons that I think having a qualified CPA is always important.

And this is particularly the case with regard to some recent, very meaningful changes. This past tax year saw a few big tax wrinkles that seemed to catch some taxpayers off-guard. Both of these are the result of the Affordable Care Act (ACA), better known as Obamacare.

Additional Medicare Tax (Form 8959)

The first new tax is the Additional Medicare Tax. For higher income individuals, there may be an additional 0.9% Medicare tax collected on your earnings in excess of the IRS thresholds. Note that these are not income thresholds (AGI) but rather compensation (before many deductions) thresholds. This is a departure from most IRS measures. Currently these thresholds are:

This applies to employees as well as to those who are self-employed. If you are an employee, theoretically your employer should be withholding this amount from your paychecks. But this can get tricky. For instance, say you are a married couple and each spouse earns $150,000. Neither employee individually has exceeded the $250,000 threshold so neither employer will withhold the Additional Medicare Tax. In this case, the entirety of the bill will be due when the tax return is filed if arrangements are not made with the employers beforehand.

The good news is that the overall rate is pretty low – since the tax is only on the amount over the threshold level. In the above scenario the couple would have to shell out $450 (which given the income level, should not be too big of a deal).

That’s the lesser of the two new tax “evils.” Now, here comes the greater (i.e. more costly) of the two. This one affects more people and can pack more of a tax wallop. I’m referring to The Net Investment Income Tax.

Net Investment Income Tax (Form 8960)

The Net Investment Income Tax (or NIIT) is a 3.8% tax on the lesser of:

1. Net investment income
2. Modified Adjusted Gross Income (MAGI)

This tax can only apply if your MAGI exceeds the following thresholds:

So if you’re someone with a high income and investments, this tax could be levied on your investment income. If we have a married couple with a MAGI of $300,000 and $50,000 of investment income, there is a new tax liability of $1,900. That hurts a lot more than the $450 in the previous scenario.

But what has caused the most problems and surprised a number of people is that what in some cases is included in investment income are partnership and corporate income. Not only can this bill be unexpected for that reason, but it also reduces one of the major advantages of the S-Corporation. In a previous article I had explained how income in an S-Corp beyond officer salary are not subject to Social Security or Medicare taxes. If an individual is hit with the NIIT, then some or all of the S-Corp profits are subject to the 3.8% tax. Again, this did not exist in years past and is a wrench thrown into the decision making process regarding corporate structure.

If all of this information is making your eyes cross and your head get a little swimmy – you’re not alone! This is complicated and very specialized stuff. So if you’re a business owner thinking about corporate structure, or you’re making a relatively high income and are looking for ways to reduce the painful impact of these new taxes, give me a call so we can discuss the best decision for you – taking every factor into consideration.

Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.