Econintersect: Thanks to Gregory Herman-Giddens on LinkedIn for bringing an article in The Wall Street Journal to our attention. With the SCOTUS (Supreme Court of the United States) decision last week, all the provisions of the PPACA (Patient Protection and Affordable Care Act of 2010, aka Obamacare), except for one, are now on a path to implementation. Included in this will be a tax increase on investments. Starting on 01 January 2013, individuals with incomes above $200,000 (couples above $250,000) will pay higher taxes on investment income to the tune of a 3.8% surtax.
The tax which will start in less than six months was discussed in an article in The Wall Street Journal Monday (02 July 2012). From that article:
The new tax, which Congress passed in 2010, affects the net investment income of most joint filers with adjusted gross income of more than $250,000 ($200,000 for single filers). Starting on Jan. 1, 2013, the tax rates on long-term capital gains and dividends for these earners will jump from their current historic low of 15% to 18.8%, assuming Congress extends the current law.
However, if the fiscal cliff does occur, or the avoidance does not include the extension of the Bush tax cuts for high incomes, capital gains taxes would increase to 23.8% and dividends would see a top bracket tax rate of 43.4%. If the dividends were paid by a company paying the top corporate income tax of 34% (many pay much less), the earnings that paid back to a top bracket share holder would experience a total income tax of 71%.
Using the following graph from Political Calculations as a guide, approximately 99% of individuals will not experience any tax changes under the ACA investment tax provisions.
For married filing jointly, the Tax Policy Institute shows that the $250,000 level was achieved by approximately 6.6% of all taxpayers in 2011, so the tax increase starts at a much lower percentile for couples. If a couple making $400,000 can equally split their income they can avoid being hit by the surtax if they divorce. The $400,000 level for couples is approximately the start of the top 2.9%.
- Get Ready for the New Investment Tax (Laura Saunders, The Wall Street Journal, 02 July 2012)
- The Fiscal Cliff Explained (Thomas Kenny, About.com Bonds, not dated)
- The Distribution of Income for 201: Individuals (Political Calculations, 13 September 2012)
- Income Breaks (Tax Policy Center, 21 May 2011)