New Client Alert Explains IRA and Retirement Plan Limits for 2013 - October 22, 2012

IRA contribution limits

The maximum amount you can contribute to a traditional IRA or Roth IRA in 2013 increases to $5,500 (or 100% of your earned income, if less), up from $5,000 in 2012. The maximum catch-up contribution for those age 50 or older remains at $1,000. (You can contribute to both a traditional and Roth IRA in 2013, but your total contributions can't exceed this annual limit.)

Traditional IRA deduction limits for 2013

The income limits for determining the deductibility of traditional IRA contributions have also increased for 2013 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income ("modified adjusted gross income," or MAGI) is $59,000 or less (up from $58,000 in 2012). If you're married and filing a joint return, you can fully deduct your IRA contribution if your MAGI is $95,000 or less (up from $92,000 in 2012). If you're not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $178,000 or less (up from $173,000 in 2012).

If your 2013 federal income tax filing status is:	Your IRA deduction is reduced if your MAGI is between:	Your deduction is eliminated if your MAGI is:
Single or head of household	$59,000 and $69,000	$69,000 or more
Married filing jointly or qualifying widow(er)*	$95,000 and $115,000 (combined)	$115,000 or more (combined)
Married filing separately	$0 and $10,000	$10,000 or more

*If you're not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $178,000 to $188,000, and eliminated if your MAGI exceeds $188,000.

Roth IRA contribution limits for 2013

The income limits for determining how much you can contribute to a Roth IRA have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2013 if your MAGI is $112,000 or less (up from $110,000 in 2012). And if you're married and filing a joint return, you can make a full contribution if your MAGI is $178,000 or less (up from $173,000 in 2012). (Again, contributions can't exceed 100% of your earned income.)

If your 2013 federal income tax filing status is:	Your Roth IRA contribution is reduced if your MAGI is:	You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household	More than $112,000 but less than $127,000	$127,000 or more
Married filing jointly or qualifying widow(er)	More than $178,000 but less than $188,000 (combined)	$188,000 or more (combined)
Married filing separately	More than $0 but less than $10,000	$10,000 or more

Employer retirement plans

The maximum amount you can contribute (your "elective deferrals") to a 401(k) plan has increased for 2013. The limit (which also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Plan) is $17,500 in 2013 (up from $17,000 in 2012). If you're age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2013 (unchanged from 2012). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can't exceed the annual limit ($17,500 in 2013 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan--a total of $35,000 in 2013 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan has increased to $12,000 for 2013, up from $11,500 in 2012. The catch-up limit for those age 50 or older remains unchanged at $2,500.

Plan type:	Annual dollar limit:	Catch-up limit:
401(k), 403(b), governmental 457(b), SAR-SEP, Federal Thrift Plan	$17,500	$5,500
SIMPLE plans	$12,000	$2,500

Note: Contributions can't exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2013 is $51,000 (up from $50,000 in 2012), plus age-50 catch-up contributions. (This includes both your contributions and your employer's contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans has increased to $255,000, up from $250,000 in 2012; and the dollar threshold for determining highly compensated employees remains unchanged at $115,000.

May Newsletter

Schnack Financial Group, Inc Randy Schnack President/CEO 227 South Blvd Oak Park, IL 60302-4712 708-386-2790 info@schnackfinancial.com www.SchnackFinancial.com

Schnack Financial Newsletter Helping you achieve your financial goals since '75 May 2012 Schnack Financial Newsletter

Hidden Taxes: What Is Your True Cost? We are pretty well aware of the taxes we must pay as U.S. citizens; income taxes, payroll taxes, sales taxes, property taxes, and gift and estate taxes, to name a few. We can easily see these taxes on our pay stubs, tax bills, and sales receipts. But, there are other taxes imposed on us that you may not be aware of. They are "hidden taxes." More Details Why Women Need Social Security Did you know that the first person ever to receive ongoing Social Security benefits was a woman? More Details Pay Down Debt or Save and Invest? There are certainly a variety of strategies for paying off debt, many of which can reduce how long it will take to pay off the debt and the total interest paid. But should you pay off the debt? Or should you save and invest? More Details What is personal liability insurance and do I have it? Personal liability insurance protects your assets if you injure another person or damage someone else's property. More Details What is umbrella insurance and why do I need it? Umbrella liability insurance (ULI) provides additional liability coverage in excess of the liability coverage provided by other insurance policies, such as homeowners, renters, and auto insurance. More Details

Refer a friend

This material is designed to provide information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Schnack Financial Group, Inc., its affiliated companies, and their representatives do not give legal or tax advice. Use of this material constitutes understanding and acceptance of these provisions. Schnack Financial Group, Inc. and specifically Randall Schnack, its president, is licensed to solicit and sell insurance, annuities and/or securities in the following jurisdictions only: AZ, CA (#0E19595), FL, GA, IL, IN, IA, MI, OH, NE, TX, WI. We are not able to discuss or sell insurance, annuities and securities to individuals or entities who reside outside of these jurisdictions. Residents living in any jurisdiction where we do not hold the appropriate license will be referred to an associate who is licensed in that resident's jurisdiction. This communication is strictly intended for individuals residing in the state(s) of AZ, CA, FL, GA, IL and MI. No offers may be made or accepted from any resident outside the specific states referenced.

Schnack Financial Newsletter for August 2011

Talking to Your Child about College Expectations If you're the parent of a high school student, it's never been more important to have a grown-up conversation with your child about college expectations. While every family is different, a frank discussion should help both parties get on the same page. Talking points can include costs, grades, and course of study. More Details

Medicare and Medicaid: Do You Know the Difference? Medicare and Medicaid are similar-sounding programs that are easily confused, but these government-run health-care programs are quite different. Here's a look at the coverage each provides. More Details

All about Indices Do you know how an index works, and why understanding the nuts and bolts of a specific index can make a difference to your portfolio? More Details

I'm buying a laptop online--will I have to pay sales tax? Whether or not you owe sales tax on an online purchase depends on a number of factors, including whether the online company that you're purchasing your goods from has a substantial presence in your state. More Details Can I deduct state sales tax on my federal income tax return? Individuals who itemize deductions on Schedule A of Form 1040 in 2011 can elect to deduct state and local general sales tax in lieu of deducting state and local income tax. More Details

Estate Tax Changes under the 2010 Tax Relief Act

Estate Tax Changes under the 2010 Tax Relief Act

New rules offer easier cost basis reporting

Brokers must track and report cost basis

If you're contemplating selling stock in 2011 and beyond, you should be aware of new federal regulations that give you more flexibility in managing the tax impact of your investment decisions. The new regulations, which went into effect January 1, 2011, require brokers to track your cost basis. Even better, they allow you to determine how your brokerage firm reports the cost basis of a sale. That can be helpful if you want to minimize the amount of gain on which you'll owe federal income tax or maximize a capital loss.

Your cost basis represents the original purchase price of a security plus any commissions or other fees; your adjusted cost basis is that cost basis adjusted for a variety of factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends. Until now, reporting the gain or loss from your investments has been your responsibility, and could be very challenging for the average investor. The new regulations should make it easier to record your capital losses or gains accurately on your federal income tax form.

The Emergency Economic Stabilization Act of 2008 requires that, as of January 1, 2011, U.S. broker-dealers and other financial intermediaries must not only track the adjusted cost basis of their investors' accounts, but also report that basis to investor clients on their 1099 forms and to the Internal Revenue Service. The rules will be implemented over time. They'll apply to shares of individual stocks you buy after January 1, 2011, to investments in mutual funds and dividend reinvestment plans after January 1, 2012, and to bonds, options and other securities bought after January 1, 2013. Shares acquired before January 1, 2011 are exempt from the new rules, as are securities held in retirement accounts.

You can tailor your reporting method to suit your tax situation

The new regulations allow you to determine in advance what accounting method you wish to use for each sale of stock after January 1, 2011. Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for "first in, first out"), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO ("last in, first out") or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).

You may be able to put in a standing order specifying the method you want to use for all trades, or choose on a case-by-case basis; you may also authorize your financial professional to make that decision for you. The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three days after execution of the trade). After the trade settles, you cannot change your mind about the method used. Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days).

Because the new regulations don't apply to investments purchased before January 1, 2011, you'll still need to do your own calculations on those transactions. The cost basis information will be included on the 1099 form you receive from your broker for tax year 2011.

--see disclaimer below--

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. In addition to providing a 13-month extension of benefits for the long-term unemployed, the legislation includes a long-anticipated extension of the "Bush tax cuts" that were scheduled to expire on January 1, 2011. Other significant provisions include a new alternative minimum tax (AMT) "patch," a major modification of the estate tax, and a new 1-year 2% employee Social Security payroll tax reduction.

Income tax rates

The Act extends existing federal income tax rates for 2 additional years. As in 2010, the federal tax bracket rates for 2011 and 2012 will be 10%, 15%, 25%, 28%, 33%, and 35%. (Without this legislation, federal income tax rates would have increased beginning in 2011--the current 10% federal income tax bracket would have disappeared, and the five remaining tax brackets would have been 15%, 28%, 31%, 36%, and 39.6%.)

Tax rates for long-term capital gain and qualifying dividends

Existing tax rates for long-term capital gains and qualifying dividends are also extended through 2012. As a result, long-term capital gain and qualifying dividends will continue to be taxed at a maximum rate of 15%. For individuals in the 10% or 15% marginal income tax bracket, a special 0% rate will generally continue to apply.

Alternative minimum tax (AMT)

The Act includes another temporary "patch" for the AMT--this one good for 2010 and 2011. AMT exemption amounts are slightly increased, and personal nonrefundable tax credits will be allowed to offset AMT liability through 2011.

AMT exemption amounts	2010	2011
Married filing jointly	$72,450	$74,450
Single or head of household	$47,450	$48,450
Married filing separately	$36,225	$37,225

Estate tax

The Act makes several major-- though temporary-- changes to the federal estate tax, including:

• For 2011 and 2012, the estate tax exemption amount (the applicable exclusion amount) will be $5 million per person (the $5 million will be indexed for inflation in 2012); the top estate and gift tax rate for these years will be 35%
• The $5 million exemption amount and 35% top estate tax rate will apply retroactively to 2010 as well, but for individuals who died in 2010, an election can be made to choose the estate tax provisions effective prior to this legislation (i.e., no estate tax, but modified carryover basis rules); an extended due date is provided for individuals who died on or after January 1, 2010, but before December 17, 2010.
• Beginning in 2011, the gift tax (reunified with the estate tax) will have a $5 million dollar exemption amount; the generation-skipping transfer tax, with a $5 million exemption effective January 1, 2010, will have a 0% tax rate for 2010, and a 35% rate for 2011 and 2012
• For 2011 and 2012, when one spouse dies, any unused portion of that spouse's estate tax exemption amount may be transferred to the surviving spouse

One-year reduction in employee payroll tax

For the 2011 year, the employee portion of the Social Security retirement component of FICA employment tax is reduced by 2%. Normally equal to 6.2% of covered wages up to the taxable wage base ($106,800 in 2011), for 2011 this rate will be reduced to 4.2%. Self-employed individuals, who normally pay 12.4% for the Social Security portion of their self-employment taxes, will also benefit from a 2% reduction, paying the tax at a rate of 10.4% for 2011.

"Bonus" depreciation

The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional 50% depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as regular tax. The Small Business Jobs Act extended the 50% additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010.

This Act increases the bonus depreciation percentage to 100% for property acquired and placed in service after September 8, 2010 and before January 1, 2012. The Act extends bonus depreciation at the 50% level through 2012 (50% bonus depreciation will apply for property placed in service after December 31, 2011, and before January 1, 2013).

IRC Section 179 expense limits

Section 179 of the Internal Revenue Code allows businesses to elect to deduct the cost of depreciable tangible personal property acquired for use in the business in the year of purchase, rather than through depreciation deductions. Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179.

Most recently, the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008 and 2009. This amount was reduced by the amount by which the cost of qualifying property placed in service during the year exceeded $800,000. For tax years 2010 and 2011, the Small Business Jobs Act increased the maximum amount that may be expensed under Section 179 to $500,000 and increased the phase-out threshold amount to $2 million.

For 2012, the dollar limit amount and phase-out threshold level were scheduled to drop to $25,000 and $200,000, respectively. This Act sets the IRC Section 179 expense limit for 2012 at its 2007 level--$125,000, with a phase-out threshold of $500,000--indexed for inflation.

Small business stock exclusion

Noncorporate investors may generally exclude 50% of any capital gain from the sale or exchange of qualified small business stock (generally, stock issued by domestic C corporations whose assets do not exceed $50 million) issued after August 10, 1993 (if a five-year holding period requirement and other requirements are met). The Small Business Jobs Act temporarily increased the exclusion percentage for qualified small business stock acquired during 2010 to 100%, and does not treat the excluded gain as an alternative minimum tax preference. Therefore, no regular tax or alternative minimum tax is imposed on the sale of qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2011, and held at least five years.

This Act extends the 100% exclusion for one year--to qualifying stock acquired before January 1, 2012, and held for more than five years.

Education provisions

• The Act extends the American Opportunity tax credit (known as the Hope tax credit before being significantly-- though temporarily--modified by the American Recovery and Reinvestment Act of 2009). The American Opportunity Tax Credit's higher maximum credit amount, increased income limits, expanded applicability to the first four years of college, and potential refundability, available in 2009 and 2010, are extended through 2012.
• The current rules that apply to Coverdell Education Savings Accounts (e.g., $2,000 annual contribution limit, education expenses expanded to include elementary and secondary school expenses) are also extended through 2012. Without this change, the annual contribution limit would have dropped to $500 beginning January 1, 2011.
• For the student loan interest deduction, increased income limits and the suspension of the 60-month rule, which would have expired at the end of 2010, are extended for 2 years (the deduction was, prior to 2001, limited to interest paid in the first 60 months of repayment).
• The deduction for qualified higher education expenses, which expired at the end of 2009, is retroactively reinstated for 2010, and extended through 2011.

Other provisions--individuals

Provisions extended through 2012 include:

• Itemized deductions and personal and dependency exemptions will not be reduced for higher-income individuals
• "Marriage penalty" relief in the form of an expanded 15% tax bracket and an increased standard deduction amount for married individuals filing jointly
• Exclusion of up to $5,250 in employer-provided education assistance for undergraduate and graduate education
• Increased earned income tax credit (EITC) for families with 3 or more children, and increased EITC income limits for married couples filing jointly
• Increased child tax credit amount with expanded refundability (15% of earnings above $3,000)
• Expanded credit for child and dependent care expenses (increased limit on eligible expenses and maximum credit percentage)
• An increased adoption tax credit and employer-paid adoption assistance exclusion amount; the credit also remains refundable

Provisions retroactively reinstated for 2010 and extended through 2011 include:

• The deduction for state and local sales tax in lieu of state and local income tax on Schedule A
• The $250 above-the-line deduction for elementary school and secondary schoolteacher classroom expenses
• Increased contribution limits and carryforward period for contributions of capital gain property for conservation purposes
• Tax-free distributions to charitable organizations from IRAs by individuals age 70 1/2 or older (up to $100,000 per year); a special provision in the Act allows qualifying individuals to treat a distribution made from an IRA to a charity in January, 2011, as if it were made in 2010

Provisions extended for one year (through 2011):

• Increased monthly exclusion amount for employer-provided transit and vanpool benefits
• Mortgage insurance premiums deductible as qualified residence interest, subject to an adjusted gross income (AGI) limitation

The Act also reinstates the tax credit for energy-efficient improvements to existing homes for 2011, but as it applied prior to the American Recovery and Reinvestment Act of 2009 (e.g., a 10% credit rate generally applies).

Other provisions--businesses

Provisions extended through 2011 include:

• Research and development credit
• Indian employment credit
• New Markets tax credit
• Employer wage credit for activated military reservists
• Enhanced charitable deductions for contributions of food inventory, book inventories, and computer equipment
• Work opportunity tax credit

--see disclaimer below--

Week in Review: Eurozone debt crisis, slow U.S. labor recovery rock global financial markets

U.S. economic news

Employers add fewer jobs than expected
The U.S. economy added fewer jobs than expected in November, and the unemployment rate unexpectedly increased. Nonfarm payrolls increased 39,000, less than expected, and the jobless rate rose to 9.8%, the highest since April. Hours worked and earnings stagnated. The numbers underline the continued weakness in the labor market, whose turnaround is seen as key to economic recovery. This week the law that extended unemployment benefits to as long as 99 weeks expired after Democratic and Republican senators blocked rival attempts to renew it. That means that extended jobless benefits affecting about two million people are set to expire at the end of the year.

Other data suggest recovery gathering momentum
Despite the discouraging signs from the labor market, other reports showed momentum this week. Retailers have reported robust November sales as consumers kept spending despite high unemployment. U.S. manufacturing expanded for the sixteenth month in a row in November, according to the Institute for Supply Management. Factory output grew as consumers and businesses spent more on autos, computers, and other goods. Also last month, consumer confidence rose, according to the Consumer Confidence Index^®. The measure rose to 54.1 in November from 49.9 in October, reaching its highest level in five months

Housing prices still falling
The Standard & Poor's/Case-Shiller index of home values showed that home prices are falling faster in the nation's largest cities than in the rest of the country. The home-price index fell 0.7% in September from August. Eighteen of the 20 cities recorded monthly price declines.

House agrees to extend tax cuts
The U.S. House of Representatives approved legislation this week that would extend the current tax rates on income up to $250,000. They also agreed to allow taxes on higher earnings to increase. However, the legislation is expected to fail in the Senate.

U.S. and global corporate news

S&P puts several Portuguese banks on credit watch
Standard & Poor's said it has put several Portuguese banks on credit watch with negative implications after it did the same with Portugal's long-term rating earlier in the week. The banks put on watch include Banco Santander, Santander Totta, Banco Comercial Portugues, Banco Espirito Santo, Banco BPI and the state-owned Caixa Geral de Depositos. S&P said it believes "that Portugal's macroeconomic challenges and difficult external financing conditions will put pressure on the bank's operating environment, potentially weakening their creditworthiness."

Toll Brothers swings to profit
The luxury home builder Toll Brothers swung to a profit for the second quarter in a row. The builder was helped by a tax benefit and fewer writedowns. At the same time revenues fell less than expected.

Global economic news

ECB extends liquidity measures
As the crisis in Ireland rocked global markets, the European Central Bank opted to extend its special liquidity measures, abandoning plans to wind down emergency support for banks and government debt markets. ECB President Jean-Claude Trichet said the ECB would continue to offer unlimited liquidity to banks for as long as necessary. He added that the bank would continue its special bond purchasing program to support the weakened eurozone debt markets.

Eurozone and U.K. economies show slow recovery
Meanwhile, reports this week showed that the eurozone economy slowed sharply in the third quarter as business investment ground to a halt. The slowing investment suggests companies are still too uncertain about the prospects of recovery to commit more capital. In the United Kingdom, weak confidence and jobs cuts weighed down the dominant services sector, which expanded at a marginally slower pace in November.

India posts 8.9% growth for quarter
India posted an 8.9% year-over-year increase for the quarter ended September 30 as the country's economic expansion continued.


Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section of mfs.com.

Past performance is no guarantee of future results.
 
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com

Small Business Jobs Act

Small Business Jobs Act

October Newsletter

Medicare Annual Enrollment Season Is Here The annual enrollment period for Medicare runs from November 15 through December 31. During this period, you can make changes to your Medicare coverage that will be effective on January 1, 2011. Even if you like the Medicare coverage you already have, it's a good time to explore your options, especially if your health or financial circumstances have changed. More Details

They're Baaack: RMDs for 2010 In response to deteriorating economic conditions in 2008, Congress waived required minimum distributions (RMDs) from IRAs and defined contribution employer plans for the 2009 calendar year. This allowed individuals to avoid having to deplete retirement plan assets while the value of those assets was suddenly depressed. But RMDs are back for 2010. Here's how the rules apply. More Details

Year-End Investment Planning Is More Challenging in 2010 Significant changes in the tax code scheduled to go into effect in 2011 could substantially alter the taxation of your portfolio. That could in turn affect whether your current investments will still be appropriate in the future. More Details

What does a stronger dollar mean for my portfolio? A stronger dollar can have a profound impact on the value of your portfolio, even if you don't think you own any international investments. More Details Why should I care about Europe's debt problems? How is it possible for the debt of such a relatively small country as Greece to have such a profound impact on investments in a 401(k) plan a continent away? More Details --see disclaimer below--

Health-Care Reform: High-Income Individuals Face New Medicare-Related Taxes in 2013

The recently enacted health-care reform legislation includes new Medicare-related taxes. These new taxes take effect in 2013, and target high-income individuals and families. While additional details and clarifications will become available between now and 2013, here's what you need to know.
 
New additional Medicare payroll tax

If you receive a paycheck, you probably have some familiarity with the Federal Insurance Contributions Act (FICA) employment tax; at the very least, you've probably seen the tax deducted on your paystub. The old age, survivors, and disability insurance (“OASDI”) portion of this FICA tax is equal to 6.2% of covered wages (up to $106,800 in 2010). The hospital insurance or HI portion of the tax (commonly referred to as the Medicare payroll tax) is equal to 1.45% of covered wages, and is not subject to a wage cap. FICA tax is assessed on both employers and employees (that is, an employer is subject to the 6.2% OASDI tax and the 1.45% HI tax, and each employee is subject to the 6.2% OASDI tax and the 1.45% HI tax on wages as well), with employers responsible for collecting and remitting the employees' portions of the tax.

Self-employed individuals are responsible for paying an amount equivalent to the combined employer and employee rates on net self-employment income (12.4% OASDI tax on net self-employment income up to the taxable wage base, and 2.9% HI tax on all net self-employment income), but are able to take a deduction for one-half of self-employment taxes paid.

Beginning in 2013, the new health reform legislation increases the hospital insurance (HI) tax on high-wage individuals by 0.9% (to 2.35%). Who's subject to the additional tax? If you're married and file a joint federal income tax return, the additional HI tax will apply to the extent that the combined wages of you and your spouse exceed $250,000. If you're married but file a separate return, the additional tax will apply to wages that exceed $125,000. For everyone else, the threshold is $200,000 of wages. So, in 2013, a single individual with wages of $230,000 will owe HI tax at a rate of 1.45% on the first $200,000 of wages, and HI tax at a rate of 2.35% on the remaining $30,000 of wages for the year.

Employers will be responsible for collecting and remitting the additional tax on wages that exceed $200,000. (Employers will not factor in the wages of a married employee's spouse.) You'll be responsible for the additional tax if the amount withheld from your wages is insufficient. The employer portion of the HI tax remains unchanged (at 1.45%).

If you're self-employed, the additional 0.9% tax applies to self-employment income that exceeds the dollar amounts above (reduced, though, by any wages subject to FICA tax). If you're self-employed, you won't be able to deduct any portion of the additional tax.

New Medicare contribution tax on unearned income

Beginning in 2013, a new 3.8% Medicare contribution tax will be imposed on the unearned income of high-income individuals (the new tax is also imposed on estates and trusts, although slightly different rules apply). The tax is equal to 3.8% of the lesser of:

• Your net investment income (generally, net income from interest, dividends, annuities, royalties and rents, and capital gains, as well as income from a business that is considered a passive activity or a business that trades financial instruments or commodities), or
• Your modified adjusted gross income (basically, your adjusted gross income increased by any foreign earned income exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return).

So, effectively, you're only subject to the additional 3.8% tax if your adjusted gross income exceeds the dollar thresholds listed above. It's worth noting that interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence that are excluded from gross income are not considered net investment income for purposes of the additional tax. Qualified retirement plan and IRA distributions are also not considered investment income.

Together, these two new Medicare-related taxes are expected to provide a major source of revenue to finance other parts of health-care reform. The Joint Committee on Taxation projects that the combined revenue attributable to these two new taxes will exceed $210 billion over the ten-year period ending in 2019 (Source: Joint Committee on Taxation, Publication JCX-17-10, March 20, 2010).

Hiring Incentives to Restore Employment (HIRE) Act - Multimedia Presentation

On March 29th we posted information about the HIRE Act which was signed into law on March 18th. We are providing this video flash presentation as another means of keeping our clients and consumers up to date on the latest information about this new law. We hope that you find it informative.

Hiring Incentives to  Restore Employment (HIRE) Act View the Flash Client Alert > --see disclaimer below--