Higher income means additional Medicare tax
Beginning in 2013, the law provides for an additional tax on net investment income, referred to as the “Unearned Income Medicare Contribution.” This tax will be based on net investment income or MAGI (Modified Adjusted Gross Income) in excess of $250,000 for a family or $200,000 for a single taxpayer. For purposes of this tax:

• MAGI is Adjusted Gross Income (AGI) plus income normally offset by the foreign earned income exclusion. Because this exclusion impacts relatively few taxpayers, most individuals will simply consider their AGI.

• Net investment income includes taxable interest (but not tax-exempt interest), dividends, capital gains, and annuity, rental and royalty income.
• Some investment income may be exempt from this tax, as would distributions from qualified plans and IRAs.

Higher income means additional Medicare tax
Beginning in 2013, the Medicare tax rate will increase for all wages earned by a family making more than $250,000. There is no change to the Medicare tax paid by employers on those same wages. Some things to consider:

• Because it is imposed on family income, it is possible that–in a family where neither spouse would be subject to the tax based on individual income –their combined income would put them over the threshold.
• Employers aren’t required to consider a spouse’s income when determining if this tax applies to their employees. So a family could be responsible for the additional tax without it being withheld throughout the year.

New restrictions on medical deductions and health savings accounts
Other tax implications of the new law include:

• Beginning in 2013, the threshold for medical expenses to be considered eligible for tax deduction will increase, although the current floor will still apply for any taxpayer or spouse who reaches age 65 before the end of the year.
• Employee income deferrals to qualified health flexible spending accounts will be limited in 2013. Plans that allow for larger deferrals will not be considered qualified plans. This change will not apply to health reimbursement accounts.
• The penalty for HSA or Archer MSA distributions not used for qualified medical expenses will increase in 2011.

The tax changes touched on above could have significant implications for your wealth management plans. To learn more about the details of these changes and what they could mean for you, we encourage you to contact your Financial Advisor and Tax Advisor. Working together, they can help you plan proactively for these potential new taxes.