Self-Employed Can Avoid Obamacare Tax by Retooling Income
IRS Formalizes Another Obamacare Tax
After a bungled website and a wave of cancelled insurance plans, Obamacare has been one of – if not the – biggest news topics of Fall 2013.
The Affordable Care Act created a variety of new taxes: taxes on capital gains, dividends, medical devices, and tanning salons, among others.
But with a little finesse and innovative accounting, one new tax that’s been in effect since January 1, 2013 can be avoided by the self-employed and those with an extra income stream. By postponing invoices or advancing expenses, the self-employed can help soften the blow to their business bank accounts.
Obamacare will bring an additional 0.9 percent Medicare tax to some families’ tax returns come April 2013. While the federal government may have had trouble making websites, the IRS is implementing Obamacare with ease as it instituted the tax’s relevant rules in December 2013.
It affects wages and income earned by the self-employed beyond $250,000 per household or $200,000 per individual. If you’re paid with a regular paystub, the 0.9 percent tax will be withheld, as employers have to collect it. An individual’s wage income that exceeds $200,000 will be subjected to a total Medicare tax of 2.35 percent.
But for households with dual incomes, or individuals with dual income streams, things can get tricky. If two spouses earned enough to avoid the 0.9 percent tax individually (e.g., each earned $199,000 a year), they’ll notice a hefty bill come April as their combined annual income would exceed $250,000.
But self-employed taxpayers, or those with a side job in an independent contractor capacity, still have time to thwart this impact on tax returns filed next year.
The self-employed and those with a second income stream (like independent contractors) can postpone invoices into next year to avoid raising their total income beyond the annual $200,000 or $250,000 threshold levels for individuals or households, respectively. That would prevent the 0.9 percent from kicking in. Another option is to offset this year’s total income by making expense payments early so they can be written off for the 2013 tax year.
The trick is to keep total 2013 income below these threshold levels. However, such moves should be reasonable to withstand IRS scrutiny.
If you’re a regular wage earner, one option is to defer taking out options until after January 1, 2014. Another option is to defer some income as well. These moves can help keep you under the threshold levels for 2013 and let you keep that extra 0.9 percent of your money
How will the Obamacare tax impact your tax return? We want to know. Comment below or tweet us @StopIRSDebt.