More Fiscal Cliff Changes Affecting Physicians

Jon C. Ylinen

Some more highlights (or lowlights) from the fiscal cliff deal, including tax deduction limitations on high-income earners as well as the new rules for converting to a Roth 401(k).

A bit of the dust has now settled from the dreaded fiscal cliff and I thought I would take this article to syphon out the highlights (or lowlights depending on your perspective) from the changes.

The notable change was that couples earning more than $450,000 and individuals earning more than $400,000 a year now pay 39.6% income tax. For everyone else, the Bush tax cuts were made permanent. Capital gains and dividends taxes also went up to 20% for individual filers making $400,000 and couples making $450,000.

Furthermore, the employee portion of the Social Security tax increases by 2% across the board and estate taxes rose to 40%, but the exemptions stayed set at $5 million for individuals and $10 million for couples. (Read more about these taxes here.)

Here are some more changes:

Roth conversion options now exist for accounts with existing employer accounts

It is now allowed to convert accounts from traditional 401(k) accounts to Roth 401(k) accounts with an existing employer. There used to have to be a separation of employment to be able to have this opportunity beyond a back door Roth IRA conversion.

Keep in mind, a Roth 401(k) is a taxable event, and will result in income taxes due on the amount converted.

Tax deduction limitations

There are new limits on tax deductions and limitations

for single filers at $250,000 and married filers at $300,000

. The new limits phase high earners out of popular itemized deductions such as the mortgage interest deduction, charitable contributions, state income tax payments, property taxes paid, etc.

This phase is gradual and takes away 3% of the deductions of the amount over the thresholds not to exceed an 80% deduction.

Hypothetical Example

A married filer who is making $500,000 (over the threshold by $200,000) has total itemized deductions of $50,000. The amount over the threshold cannot take away 3% of the deductions, so the equation is $200,000 x .03 = $6,000. As a result the filer is now limited to $44,000 of itemized deductions. This change potentially boosts the couple’s tax bill by $2,000 or so as a rough estimate.

This list is not meant to be a complete summary of the every last change that was made, as many smaller items and details were included in some of the bigger changes.

Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax or legal advice. Please consult a tax or legal professional for information regarding your specific situation. 615085/ DOFU 1-2013