The Tax Increases Have Begun
by Lewitt Hackman’s Trusts & Estate Planning Practice Group
December 4, 2012
With the “fiscal cliff” discussions front and center, many people do not realize that certain tax increases are already being implemented, both at the federal and at the state level.
Earlier this week, the IRS released 159 pages of new tax rules related to the implementation of the 2010 healthcare reform law, sometimes known as “Obamacare”.
First, there is a 3.8 percent surtax on “investment income” for individuals earning more than $200,000 in modified adjusted gross income, and married couples filing jointly with more than $250,000 of such income (notwithstanding the 159 pages, there are still numerous uncertainties as to what constitutes “investment income”).
This surtax will be applied to capital gains and dividend income and is the first of its kind applying to capital gains and dividend income. The IRS offered the example of a single taxpayer who makes $180,000 in wages plus $90,000 in investment income (a modified adjusted gross income of $270,000). The 3.8 percent tax would apply to $70,000, resulting in a $2,660 surtax.
In addition, there is a 0.9 percent healthcare tax on wages (i.e., the employee portion of the payroll tax) for such “high-income” individuals. These rules are effective for the tax year starting January 1, 2013, though the IRS will take public comments and hold hearings in April before making the rules final in the fall. It is estimated that these tax increases will raise $317.7 billion over 10 years. We believe that employers must start to withhold once an employee’s wages pass $200,000 each year.
There are numerous other changes as part of the healthcare law, including several changes in the deductibility of medical expenses.
California State Taxes
California voters recently passed Proposition 30 by a margin of 55.3 percent to 44.7 percent. This proposition increases California sales tax to 7.5 percent from 7.25 percent.
In addition, it will result in increases in state income taxes for “high-income” tax brackets. These California income tax increases will apply retroactively to January 1, 2012, as follows:
- 10.3 percent tax rate on taxable income for individuals between $250,000 and $300,000, and for married couples filing jointly between $500,000 and $600,000 (formerly 9.3 percent);
- 11.3 percent tax rate on taxable income for individuals between $300,000 and $500,000, and for married couples filing jointly between $600,000 and $1,000,000 (formerly 9.3 percent); and
- 12.3 percent tax rate on taxable income for individuals over $500,000, and for married couples filing jointly over $1,000,000 (in addition, though not part of Proposition 30, there continues to be an additional 1 percent tax assessed for an individual’s taxable income in excess of $1,000,0000, pursuant to the Mental Health Services Act).
The Proposition 30 tax increases are temporary – the increased sales tax applies for four years and the increased income taxes apply for seven years. It is estimated that these taxes will bring in additional revenues to the state of approximately $6 billion annually (less after 2016-17 as a result of the sunset of the four year sales tax increase period).
On the bright side, certain proposed deep cuts to education and other government services should not occur as the result of the passage of Proposition 30.
Michael Hackman is the Chair of our Trusts and Estate Planning Practice Group, and is a Certified Specialist in Tax Law, designated by the State Bar of California Board of Legal Specialization. Kira S. Masteller is a Gift Tax, Trusts and Estate Planning Attorney.