New Obamacare tax on family business, life insurance income

Patrick Howley Political Reporter
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Obamacare installs a new tax on people earning income from family businesses and life insurance policies.

A 2010 Obamacare amendment adds a new 0.9 percent Medicare surtax for individuals earning more than $200,000, and families earning more than $250,000; and a 3.8 percent Medicare tax (known officially as the “Net Investment Income Tax”) on all of their “unearned income.”

That includes capital gains, rental income, and “gain from the sale of a second home that is not a primary residence,” according to the IRS. Royalty income and payments received from life insurance contracts are also included as “unearned income” and subject to the new tax.

Think this tax only applies to the wealthy? Think again. Your family doesn’t have to be making more than $250,000 in salary to qualify for the tax.

If your household makes $100,000 a year in salary but you’re also making $150,000 from stocks, bonds, life insurance, the sale of a second home, or any of the other kinds of income listed above, you’re getting hit with the new tax — and it applies to every dollar that you make above the threshold. If you’re a married couple filing separately, the threshold is even lower: $125,000.

Additionally, if you generate income from a family business that you aren’t intimately involved in running — which many children and relatives of entrepreneurs do — you’re getting hit.

The 3.8 percent Medicare tax is imposed on income derived from a so-called “passive activity,” like owning stock or taking income from your family’s business if you’re not “materially” participating in its day-to-day activities.

“This category would also include business income from closely-held family businesses operating in LLC or S corporation form, where some family members own units/shares but are not actively involved in the business (i.e., they are “passive” under the new tax rules),” according to a U.S. Trust, Bank of America Private Wealth Management strategy report document. “The business income that flows through to the non-involved family members would be passive income and therefore would be NII.”

The tax, which went into effect in January 2013 and will wrap up its first full tax year in existence this coming April, also applies to various kinds of trusts and estates, so long as the trust’s gross income is higher than $12,150 in 2014. This is “remarkable because trusts and estates have never been subject to Medicare type taxes before,” according to Arthur Bell Certified Public Accountants.

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