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Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act (PPACA),commonly called Obamacare, is the United States federal statute signed into law by President Barack Obama on March 23, 2010.  It phases in certain tax implications over the course of several years.  In 2013 the Internal Revenue Service is scheduled to phase in the following:

Income from self-employment and wages of single individuals in excess of $200,000 annually will be subject to an additional tax of 0.9%.  The threshold amount is $250,000 for a married couple filing jointly (threshold applies to joint compensation of the two spouses), or $125,000 for a married person filing separately.  In addition, an additional Medicare tax of 3.8% will apply to unearned income, specifically the lesser of net investment income or the amount by which adjusted gross income exceeds $200,000 ($250,000 for a married couple filing jointly; $125,000 for a married person filing separately).

Excluded from the new 3.8% Medicare tax is income received from a sole proprietorship, limited liability company, partnership, or S corporation.

How to Plan Around the PPACA in 2012?

Have you considered realizing capital gains before the start of 2013 when capital gains and unearned income tax rates are scheduled to increase?  On the other hand, after the end of 2012, you may consider deferring capital gains.  If you are in a net-capital-gain position for 2012 and predict you will be in a net-capital-gain position in 2013 or beyond, consider deferring recognition of capital losses until after 2012 because the losses may be more advantageous in future years when they can offset capital gains being taxed at a higher rate.  Keep in mind it is important to also consider the transaction costs of realizing the gain and your individual financial considerations.

For sales occurring in 2012, consider electing out of installment sale treatment and recognizing the entire amount of gain in 2012 versus deferring it over the payment period.  This will allow you to recognize the entire gain at the lower capital gain rate in 2012.  However, keep in mind your cash flow and tax rates when making such a decision.