Extra care should be given to tax planning by dentists contemplating the sale of their practices because, starting this year (2013), under the Patient Protection and Affordable Care Act (as amended by the Health Care and Education Reconciliation Act of 2010, certain unearned income of individuals, trusts, and estates is subject to a surtax (a tax payable on top of any other tax related to that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax,” is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount of ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). The threshold amount is not indexed for inflation! Can you spell AMT? The Alternative Minimum Tax (AMT) was never indexed for inflation which is why it captures such a large segment of the population now; not just the super wealthy as it was designed to do when it was enacted in 1969. For 3.8% surtax purposes, investment income is gross income from interest, dividends, annuities, royalties, and rents, unless derived in the ordinary course of a trade or business to which the 3.8% surtax doesn’t apply, and net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property such as a dental practice.
For an actual dentist client (single taxpayer) who sold their practice in 2013 with a Capital Gain of $400,000 the 3.8% Surtax, after all the various calculations, was just under $12,000. This does not include the higher Capital Gains tax rates or the .9% High Income Hospital Insurance Tax, also a part of the health care legislation, on his practice income over the threshhold. This client did not want to sell his practice but, unfortunately, had to due to health concerns.
I have described the current tax law as being wrought with moving parts. ATRA (The American Taxpayer Relief and Accountability Act of 2013); AMT, Obama Care, all interact with one another depending on the circumstances. Next time I will show some real life examples of dentists and the impact all these moving parts have on them. Until then, don’t forget to pay your 2nd quarter 2013 estimated tax payments that are due on Monday (June 17th).