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Some high earners might be in for a rude awakening when they file their taxes this year. Between new taxes, old taxes with new increases and existing taxes, even people who don’t consider themselves “wealthy” will feel the impact. Here are just some of the highlights:
Higher Top Tax Rate
The highest income tax rate is now 39.6% for top earners (over $400,000 for singles, $450,000 for married couples). Last year, for comparison, the top tax rate was 35%.
Deduction Phase-out
Itemized deductions and personal exemptions phase out for high earners, starting at $250,000 for singles and $300,000 for married filers.
Net Investment Income Tax
There is now an additional 3.8% tax on passive investment income in some cases.
Capital Gains Tax Increase
High earners can expect to see an increase from 15% to 20% on capital gains and qualified dividends. This can increase to 23.8% if the net investment income tax applies.
Medicare Surtax
High earners face an additional .9% tax on their earned income. For example, a single taxpayer with a salary of $300,000 would pay the standard Medicare tax at a rate of 1.45% on the first $200,000 of salary received, but 2.35% on the $100,000 of salary received in excess of the $200,000.
Other Considerations
Alternative Minimum Tax (AMT)
This is a bigger problem for residents of states that also have a high state income tax, but this is another tax trap that snares more taxpayers every year. Until recently, the AMT was not indexed to inflation.
Municipal Bonds
The interest earned on these is typically exempt from income taxation, but those earnings are factored in when calculating other important items, such as the threshold income on Social Security income and premiums on Medicare.
Effective planning can prevent most surprises. Nonetheless, taxes are exceedingly complicated. High earners should consult their tax and investment advisors for strategies to minimize the tax bite. For a limited time, Financial Planning Center, LLP is offering high earners a Complimentary Second Opinion on your Tax Return (standard $30 fee waived for a limited time)