Tax Advantages of Qualified Plans for Business Owners Under Health Care Reform
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This week I will be sharing several posts related to Health Care and specifically focusing on the Health Care Reform Act and what it means to you from a tax & accounting perspective.
In light of the enactment of new taxes on the investment income and wages of highly compensated employees to pay for health care reform, you may want to reconsider establishing a qualified retirement plan to reduce this future tax burden.
Beginning in 2013, the Health Care and Education Reconciliation Act of 2010 imposes a new Medicare tax on individuals equal to the lesser of 3.8% of net investment income or any excess of modified adjusted gross income over $250,000 for taxpayers filing joint returns, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers. The legislation also raises the hospital insurance tax on wages and self-employment income in excess of $200,000 ($250,000 for a joint return) by 0.9%.
You can shield from additional taxation investment returns based on distributions from retirement plans. For this purpose, net investment income includes gross income from interest, dividends, annuities, royalties and rents (other than from a trade or business), income from passive activities or from trading in financial instruments or commodities.
Importantly, under the health care legislation, net investment income does not include distributions from qualified retirement plans, including those from tax-qualified pension, profit-sharing, 401(k) and annuity plans, as well as traditional and Roth IRAs.
If you have not yet set up a qualified retirement plan, there is another reason to explore doing so. Please contact me if you have questions.