High-income clients face a number of complex tax-planning issues. Recent changes in tax law implemented by the Affordable Care Act (ACA) and ATRA have greatly increased the potential tax liability of this group of taxpayers.
Provisions important to high-income taxpayers include the following.
INCOME TAX MARGINAL RATE – ATRA permanently lowered the marginal tax rates for many middle-income taxpayers. However, it permanently increased the highest marginal tax rate for high-income earners from 35% to 39.6%. This increase affects single taxpayers with 2015 taxable incomes greater than $413,200 and married filing jointly (MFJ) taxpayers with taxable incomes greater than $464,850.
ADDITIONAL MEDICARE TAX – Beginning January 1, 2013, the ACA implemented an additional Medicare tax of 0.9% for taxpayers whose wages, compensation, and self-employment (SE) income exceeds threshold amounts. Thresholds for 2015 are $200,000 for single taxpayers and $250,000 for married filing jointly (MFJ) taxpayers. The additional Medicare tax applies to the following income categories.
- Wages and other compensation subject to Medicare
- Compensation subject to the Railroad Retirement Tax Act (RRTA)
- SE net income (an SE net loss is not considered for purposes of this tax)
- Taxable wages not paid in cash, such as noncash fringe benefits
CAPITAL GAINS TAX – ATRA permanently set the tax rate for long-term capital gains (assets held for more than one year) at 15% for many middle-income taxpayers. In addition, it eliminated a long-term capital gains tax for taxpayers in the two lowest income brackets. However, ATRA raised the long-term capital gains rate from 15% to 20% for taxpayers with ordinary income taxed at the highest marginal rate. 2015 rate is $413,200 for Single taxpayers and $464,850 for MFJ taxpayers.
PERSONAL EXEMPTION PHASEOUT – In 2015, taxpayers are granted a personal exemption of $4,000 for themselves and for each of their dependents. However, this exemption is reduced by 2% for each $2,500 (or part of $2,500) that AGI exceeds a certain threshold and is eliminated entirely at higher income levels. The phaseout begins at $258,250 for single filers and at $309,900 for MFJ filers.
ITEMIZED DEDUCTION LIMITATION – As with the personal exemption, certain itemized deductions are limited once a taxpayer reaches a certain income threshold. This limitation, sometimes called the Pease limitation, was permanently reinstated for tax years after 2012. The Pease limitation is triggered when AGI exceeds the threshold amounts for 2015 of $258,250 for single filers and $309,900 for MFJ filers.
These provisions that affect high-income taxpayers present numerous planning opportunities for tax practitioners. Don’t miss out. Get your 2015-2016 Tax Updates today!