Pozzuolo Rodden, P.C., Announces the Release of the Article: "Tax Planning- The 2013 Tax Changes- Are You Prepared?"

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This article discusses the new 2013 tax rules which will reverse much of the Bush administration tax breaks.

The Law Firm of Pozzuolo Rodden P.C., announces the release of the article "Tax Planning- The 2013 Tax Changes- Are You Prepared"? Below is a sample of the first couple of paragraphs. If you would like to read more, please read the full article and other corporate law, or estate planning topics at http://www.pozzuolo.com/Pubs_Newsletters.shtml


With the end of the year creeping up, soon enough the new 2013 tax rules reversing much of the Bush administration tax breaks will be coming to a forefront. One notable tax change is the Obamacare 3.8% Medicare tax on investment income. This is an additional tax on what is called “net investment income” for individuals who have income above specific thresholds.
What is Net Investment Income?

First, net investment income is defined to include: (1) interest, dividends, annuities, royalties, and rents except where derived from most active trades or businesses; (2) gross income from passive activities or a trade or business in financial instruments or commodities; and, (3) net gains attributable to the disposition of property other than that property held in most trades or businesses. This is a fairly wide tax base which includes generally all but wage/salary income and income from active business activity. However, there is the ability to exclude certain types of income and the use of deductions to offset such income. Income that is normally tax exempt or non recognizable is not included in net interest income. Further, this does not apply to the sale of a partnership interest or S corporation stock to the extent any gain is due to an active business activity that would not have been taxable otherwise. Last, a notable exception is that net investment income does not include distributions from ERISA plans including qualified pension plans, 401(k) plans, tax‐sheltered annuities, individual retirement accounts (“IRAs”), and 457 plans. However, Congress has explicitly left out nonqualified deferred compensation under 409A from the ERISA exception.

Further deductions are allowed to reduce net investment income to the extent “properly allocated.” While the term has not been specifically defined yet in regulations, this would likely include depreciation, operating expenses, investment expenses, interest on funds to purchase investments, advisor/broker fees, and other such related expenses.

What is a High Income Taxpayer and How are They Taxed?
The Medicare Tax applies only to a certain class of taxpayers with income in the excess of “the
threshold income”. The tax amount is 3.8% multiplied by the lesser of “net investment income” or a modified aggregate gross income (“AGI”) in excess of the threshold amounts. These thresholds are $200,000 for individuals, $250,000 for joint filers, and $125,000 for those married but filing separately. However, for trusts and estates the threshold amount is the amount for the highest tax bracket and the current amount is $11,351. The tax works such that if an individual taxpayer Andy has an modified AGI of $500,000 with net investment income of $100,000, the investment income is less than the excess over the $200,000 threshold. Thus, Andy would be taxed $3,800 on the $100,000. On the other hand, if Andy only had $220,000 of modified AGI, since the excess over the threshold is only $20,000, Andy’s extra tax would only be $760 (3.8% x $20,000). If either of these incomes were in trust, the tax would be $3,800 as the $100,000 of net investment income easily clears the difference between $11,000 and modified AGI.

If you would like to read more, please read the full article "Tax Planning- The 2013 Tax Changes- Are You Prepared?" and other corporate law or estate planning topics at http://www.pozzuolo.com/Pubs_Newsletters.shtml

Pozzuolo Rodden, P.C. provides specialized cost-effective legal services to privately held business owners and high-net-worth clients in Pennsylvania and New Jersey in excess of 35 years.

Practice Areas:
Business planning and transaction, complex business litigation, commercial real estate and development, construction law and litigation, advanced estate planning and administration, tax and pension law, high profile and intricate family litigation, and employment law and litigation.

Pozzuolo Rodden, P.C.
Counselors at Law
2033 Walnut Street
Philadelphia, PA 19103

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Joseph R. Pozzuolo, J.D., B.B.A.
Pozzulo Rodden, PC
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