New 2013 Investment Tax: What it Means For You

Posted by Don on November 28, 2012

Now that the Supreme Court has upheld Obamacare and President Obama won re-election, it is certain that come January 1, 2013, many Americans will face new taxes. The press is focusing on one aspect of the new taxes that will help pay for Obamacare, the 3.8% investment tax. But there are many other changes to the tax code because of Obamacare that the press isn’t focusing on. I will do my best to keep things simple, which is hard because well, we’re talking about the tax code here!

Source: John-Morgan

New 3.8% Investment Tax

The 3.8% tax increase will be on investment income, which includes capital gains and dividends, for filers married filing jointly earning over $250,000 per year and for single filers earning over $200,000 per year.

Remember that is applies to investment income, not wages. So if you are a single filer that earns $300,000 but have no dividends or capital gains during the year, then the tax does not apply to you. However (and this is typical tax law), wages and Social Security can raise your adjusted gross income making you vulnerable to the tax.

For example, let us say that a married couple filing jointly has earnings of $230,000 plus $170,000 of investment income. While their investment income is below the $250,000 threshold, they still owe the 3.8% tax. Their adjusted gross income is $400,000 which is $150,000 above the threshold. This $150,000 is subject to the 3.8% tax which would be $5,700.

As another example, let us say that you are a single filer that has no wages, but you receive $30,000 in Social Security and have $100,000 in investment income. You do not owe the additional 3.8% tax because your adjusted gross income is less than the $200,000 threshold.

This 3.8% tax will be added to whatever tax rates are in 2013, given that the Bush tax cuts are set to expire at the end of 2012.

What is Investment Income?

Before diving into the other taxes that will come about from Obamacare, we need to define what is considered to be investment income. As it stands now, the definition of investment income includes:

  • Dividends
  • Short and long-term capital gains
  • Royalties
  • Interest (except municipal bond interest)
  • Taxable portions of annuity payments
  • Income from the gain of selling your house
  • Net gain from selling a second house
  • Passive income from real estate investments where the taxpayer does not actively participate

Note that the tax on the gain of the sale of your primary residence is only on the gain above what is in the books for excludable income. Currently these amounts are $250,000 for single filers and $500,000 for joint filers. This means that if you are single, you would only owe the 3.8% investment tax on gains greater than $250,000. For married filing jointly the tax only applies to gains greater than $500,000.

0.9% Medicare Surtax

The Medicare tax that is deducted from your paycheck will also increase for those married filing jointly whose earnings are $250,000 and higher and single filers whose earnings are $200,000 and higher. Currently, as an employee, you a pay 1.45% Medicare tax, regardless of your earnings. As of January 1, 2013, you will now pay 2.35% on earnings above $250,000 for joint filers and $200,000 for single filers.

For example, if you are married filing jointly and your earnings are $300,000, you will owe 1.45% on the entire amount, which is $4,350. You will then owe an additional 0.9% on the $50,000 above $250,000 which comes to $450.

If you are self-employed, there is no deduction allowable on this new tax, meaning you will be paying it.

Other New Taxes from Obamacare

As I mentioned before, there are many other new taxes or changes to current tax law to help pay for Obamacare. Everyone is subject to these taxes, regardless of your income. Here is a highlighted listing of some of the one’s I feel deserve the most attention.

  • The Medicine Cabinet Tax: This tax went into effect in 2011 and excludes the reimbursement of over-the-counter medication expenses from your health savings account (HSA), flexible spending account (FSA) or health reimbursement account (HRA).
  • There is also now a cap on the amount of money you can place into a flexible spending account (FSA). The new maximum amount you can contribute to your FSA in 2013 is $2,500. While this does not seem like a big deal, many families use the money in an FSA for their special-needs child to help cover the cost of education.
  • In previous years, you could itemize your medical expenses if they exceeded 7.5% of adjusted gross income. They must now exceed 10% of your adjusted gross income if you want to itemize.
  • There will be a 2.3% tax on medical devices that cost more than $100 in 2013. While this 2.3% tax will be paid by medical device manufacturers, you can be certain that they will be passing on either a portion or all of the tax onto the purchaser of the device.
  • Finally, there will be a “penalty” tax that will be phased into effect from 2014-2016 for those who choose not to have health insurance. The “penalty” will vary in size depending on your income, but current amounts start off at $695 a person up to $4,700 a person. Again, the size of the penalty you would pay depends on your income.

Final Thoughts

I hope this gives you a better idea of what is coming your way in regards to new taxes because of Obamacare. The premise of this post was to explain the tax side of the mandate. I am not trying to make this into a pro-Obamacare or anti-Obamacare post. I am simply writing about the new taxes many will experience. I wanted to do this because the media is solely focusing on the 3.8% tax that will hit certain income groups when there are many more aspects to new taxes that relate to Obamacare.

Readers, what are your thoughts on these new taxes? Do you see any that will impact you?

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Comments to New 2013 Investment Tax: What it Means For You

  1. Yet again, the self employed and small business owners are penalized by the government! As a ‘mom and pop’ business, our taxes will increase greatly in 2013, not to mention that we pay our own health insurance, so we will be paying higher rates for that also. I’m so disgusted with the government and all politicians, I’m tired of being at their mercy.

    Monica Clark

  2. I personally prefer people who try not to be pro or anti “Obamacare” to call it by its actual name, “Patient Protection and Affordable Care Act.” Just my two cents. I will usually call it that, and then say “commonly called Obamacare.” The “New Federal Healthcare Law” is another way to refer to it.

    I know I’m being picky, but most people associate the name “Obamacare” with those who are opposed to the legislation.


    • Good point….I never thought of it that way. I figured I would just call it Obamacare since that is what the majority of those in the media call it and that most Americans would know what I was talking about right off the bat.

      I can certainly see how there could be a negative connotation with calling it Obamacare.

      Jon @ MoneySmartGuides

  3. @Micheal: many people don’t like the taxes either. Charitable deductions will not offset the new tax. The 3.8% investment tax is on adjusted gross income. Charitable deductions are made to come up with your modified adjusted gross income. So regardless of how much you donate, you will still pay the 3.8% tax if your income is high enough.

    Jon @ MoneySmartGuides

  4. “The Medicare tax that is deducted from your paycheck will also increase” Technically, I do not believe that the tax that is deducted from your paycheck will increase. The surtax is based on Modified Adjusted Gross Income, which your employer does not have any knowledge of (e.g. working spouses may go over the limit when their wages are added together, but each spouse’s employer will not know that). Therefore your employer cannot make any decisions as to what tax rate to apply.

    As far as I know, this is a surtax that you will need to calculate and pay when you file your income taxes; if you don’t want to end up owing it on April 15, increase your federal withholding to cover the tax.


    • I need to amend this post; when I initially researched this earlier in the year, there was no information about employers withholding the surtax. Just to make sure though, I did a quick Google search and found this page:

      Which says that employers must withhold the surtax on Medicare on wages above $200,000 regardless of filing status. Which results in different scenarios for working spouses depending on how much each one makes. If they are both under $200,000 but combined over $250,000, neither will have the surtax withheld, but together they will both owe it on wages over the threshold. If one spouse is over $200,000, but the other isn’t, only one spouse will have the surtax withheld (while the other spouses wages will be subject to it). If one spouse goes over $200,000 but the other spouse doesn’t work or together their wages are under $250,000, then the surtax will be withheld on wages over $200,000, but refunded when taxes are filed.


  5. Perhaps your readers would like to remind themselves of how a future benefit from Social Security is among the best options for a defined benefit income stream out there. Many people under 55 years old will never benefit from an employer pension where the employer bears all of the investment risk and guarantees to pay out a certain benefit. For example, to receive an annual benefit from your own investments of even $18,000 per year and observe a prudent withdrawal rate of 4%, you would need $450,000 of private savings.

    Restoring the payroll tax to the previous level is going to allow many people to increase their benefits in the future, which will allow them to have more secure retirement.

    Dana Twight

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