CCH has issued a new tax briefing explaining the Internal Revenue Service’s proposed regulations on the Additional Medicare Tax and Net Investment Income Tax that will take effect in January as a result of the health care reform law.
CCH’s Tax Briefing: Analysis of Post-2012 Net Investment Income Tax and Additional Medicare Tax covers the IRS’s proposed reliance regulations addressing the 0.9 percent Additional Medicare Tax on earned income and the 3.8 percent Medicare contribution tax on Net Investment Income.
Both surtaxes are scheduled to spring into full effect on Jan. 1, 2013. The proposed reliance regulations and related FAQs seek to address many of the gaps in application of these surtaxes that have been questioned by tax professionals, employers and taxpayers. At the same time, the proposed reliance regulations create new questions about application of the surtaxes.
The guidance on each of these new surtaxes is extensive and is immediately critical for affected taxpayers. While the regulations are not expected to be finalized until well into 2013 for the 2014 tax year, the IRS stated that taxpayers may rely on the proposed regulations for compliance purposes for 2013.
“Immediate action is advisable on a number of fronts,” said CCH principal federal tax analyst Mark Luscombe. “Year-end tax planning may indicate the need to accelerate income otherwise subject to one or both of the surtaxes. Employers may need to adjust their payroll practices immediately for certain employees on Jan. 1, 2013. Investment strategies and asset allocations may need revisiting, as may use of deferred compensation plans, and elections pursuant to the proposed NII regulations should be considered.”
Complicating planning even further is uncertainty over the fate of the Bush-era tax cuts after 2012: sunset of those rates for higher-income taxpayers starting in 2013 could mean a combined income and NII surtax rate as much as 43.4 percent on investments, and an additional 0.9 percent in Additional Medicare Tax on top of a possible 39.6-percent rate on wages and other income.
The new CCH tax briefing is available at Analysis of Post-2012 Net Investment Income Tax and Additional Medicare Tax. Access to other CCH Special Briefings on significant tax developments is at www.CCHGroup.com/Legislation.