Editor's note: This article by Tony Mira, president and CEO of Anesthesia Business Consultants, an anesthesia & pain management billing and practice management services company, originally appeared in Anesthesia Business Consultants eAlerts, a free electronic newsletter. Sign-up to receive this newsletter by clicking here.
Now that the elections are over, nationwide attention has turned to the so-called "fiscal cliff." The fiscal cliff refers to the effective date of automatic cuts in spending combined with increases in taxes mandated by law. It has been called a year-end "perfect storm" and "taxmageddon." One commentator at CNN referred to the fiscal cliff as "the legislative equivalent of a slow-motion train wreck."
Putting politics aside, unless new legislation is enacted between now and the end of the year, the fiscal cliff will have an impact on you and your anesthesia practice. In this week's Alert, we summarize some of the changes slated to take effect at the start of 2013. This is only a summary and not tax advice. You should consult your tax advisor regarding your response to this possible fiscal cliff.
The table below is based on gross income after exemptions:
Taxes from the Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act (also known as "Obamacare") added new taxes, which take effect in 2013. First, there will be a new 0.9 percent Medicare tax on wages above $200,000 for single filers ($250,000 for married joint filers). Second, there will be 3.8 percent tax on unearned income applicable to married couples with a modified adjusted gross income above $250,000, and to single individuals with a modified adjusted gross income of $200,000. Generally, unearned income is income that is realized from something other than employment — for example, income from rental property, dividends or stocks.
The term "capital asset" is very broad and includes depreciable property, stocks, bonds, options, and many other types of property. A capital gain (or loss) is the difference between what was paid for the capital asset and the price for which the Capital Asset sold. The current tax applied to long-term capital gains is 15 percent. This is scheduled to increase to 20 percent in 2013. In addition, capital gains are generally considered to be unearned income. Therefore, they are subject to the additional 3.8 percent tax on unearned income discussed in the section above.
Social Security is funded by dedicated payroll taxes paid by the employer and the employee. Employers and employees each typically pay a 6.28 percent tax. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily lowered the portion of the payroll tax rate paid by the employee by 2 percent. This tax cut was extended through December 2012 by the Temporary Payroll Tax Cut Continuation Act of 2011 and the Middle Class Tax Relief and Job Creation Act of 2012. Beginning in 2013, the rate will increase back to 6.2 percent. For employees making $100,000 per year, this means an increase of $2,000.
Dividend income comes generally from investments in dividend paying stocks. Dividends are paid by a corporation to its stockholders, and are subject to taxation. There are two types of dividends: qualified and ordinary. Dividends are ordinary unless they meet the criteria to be considered qualified. According to the IRS, to be considered a qualified dividend, the taxpayer "must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment."
Currently, the distinction between an ordinary dividend and a qualified dividend is important, because ordinary dividends are taxed at the taxpayer's ordinary income rate (currently up to 35 percent and scheduled to increase to 39.6 percent), while qualified dividends are subject to a maximum rate of 15 percent. In 2013, the distinction between qualified and ordinary dividends will evaporate. All dividends will be taxed at the taxpayer's ordinary income tax rate. For some taxpayers in the highest tax bracket, this means the tax rate for qualified dividends will increase nearly 300 percent. (Note: Generally, dividends, like capital gains, are considered unearned income. Therefore, they may be subject to the 3.8 percent tax on unearned income described above.)
What should you do?
You should meet with your tax advisor – and quickly! There are many different philosophies on how best to prepare for the fiscal cliff, but each taxpayer is unique, and your tax strategy should be tailored to your specific situation. Some advisors are advocating to accelerate year-end bonuses into 2012. For those taxpayers already in the highest income bracket, this would mean that the bonuses would be taxed at the current rate of 35%, not the scheduled 2013 rate of 39.6 percent. Others are advising that if you are considering selling a capital asset, you do so now, rather than waiting until 2013 to realize the gain. Beginning in 2013, taxpayers will pay an additional 5 percent on long term capital gains.
It is important that you and the other members of your practice meet with your tax advisor(s) and discuss how best to handle the upcoming changes. Taking a few minutes out of your day to proactively evaluate your taxes could prove very beneficial in the long run.
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