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Earning more? Upper-income taxpayers get an unwelcome bump

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By Susan Tompor
Saturday, April 12, 2014, 9:00 p.m.
 

Some well-to-do taxpayers won't be thrilled when they're hit with extra tax increases — which can add hundreds or thousands of dollars to the bill.

We're talking about higher tax rates for upper-income taxpayers, as well as a higher capital gains tax rate and a new investment surtax that was included in the Affordable Care Act.

“Between the increased tax brackets that went into effect in 2013, and the new 3.8 percent Medicare surtax on net investment income, many upper-income taxpayers are seeing a significant bump in their taxes,” said Patricia Bojanic, certified public accountant and tax partner at Gordon Advisors in Troy, Mich.

“It's made tax and investment planning that much more important,” Bojanic said.

Some higher-income households, she said, could end up paying a 24 percent increase or more in the taxes on their investment income.

Now, some taxpayers could be subject to an extra tax on net investment income. Investment income includes interest, dividends, royalties, rents, capital gains and passive activity income.

More people could be talking about the 3.8 percent surtax this season because of the relatively lower income threshold, said Bernie Kent, chairman of Schechter Investment Advisors in Birmingham, Mich.

“This is the one new tax that applies to the most people,” said Kent, who has worked more than 40 years with high-net worth individuals and families.

The 3.8 percent surtax would apply to married couples when modified adjusted gross income exceeds $250,000 if filing jointly, and singles when modified adjusted gross income exceeds $200,000. The surtax would apply to married couples filing separately who individually earn more than $125,000.

On top of that, an added Medicare tax of 0.9 percent on gross income from wages and self-employment would be imposed on taxpayers earning more than $200,000 single or $250,000 for joint filers, too.

Alan Semonian, certified public accountant at Ameritax Plus in Berkley, Mich., said some higher-income households this season are getting hit by the 3.8 percent surtax after receiving significant capital gains distributions from mutual funds.

Mutual funds that aren't in tax-sheltered accounts, such as IRAs or 401(k)s, are required to pass profits from capital gains, interest or dividends to individual investors. You'd owe tax on that distribution, even if you did not sell off your shares in the fund.

For those with even higher incomes, more tax hits are taking place this year.

The highest tax rate jumps back to 39.6 percent for taxable income more than $400,000 for singles and more than $450,000 for married couples. That's up from 35 percent.

Investors in the top bracket must pay 20 percent on long-term capital gains and dividends, instead of the 15 percent most others pay.

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com

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