The fiscal-cliff compromise brokered by Congress and the President has changed how investors, particularly those in the medical field, are taxed in various arenas. Capital gains, defined as the increase in value of investment or real estate assets at the time of sale, are now taxed at higher rates for virtually every investor. Several provisions of the Affordable Care Act (aka “Obamacare”) also kicked in on January 1, which has left many physicians and medical instrument makers adjusting their 1040 forms. The following breaks down how the new laws affect your small business or medical practice.
Medical Excise Tax
The Medical Device Excise Tax (MDET) took effect on December 31, 2012, and caught several Americans and one large sporting good retailer completely off guard. A 2.3 percent “medical excise” charge showed up on a Cabela’s customer receipt and made its rounds online. The company blamed the tax on a “glitch” and promptly refunded everyone who was effected. But the tax is no glitch for doctors and device manufacturers. According to the IRS website, the 2.3 percent tax applies to “the sale of certain medical devices by the manufacturer or importer of the device.” Wheelchairs, artificial knees and hips; dental devices, pacemakers, imaging technology, and even surgical gloves are just some of the many items subject to the tax. Eyeglasses, hearing aids, contact lenses, and “any other medical device that the public generally buys at retail for individual use” are exempt from the tax. The 10 largest medical device manufacturers, including Johnson and Johnson and Medtronic, will account for 86 percent of the effected sales, according to Medcitynews.com. Medical providers will have to decide whether to pass these costs to their patients, or find some other way to make up for the shortfall.
Short Term Gains
Any profitable investment sold less than one year after purchase is a short-term capital gain. This is also referred to as unearned income. The tax rate for short-term capital gains remains the same for your current tax bracket. For example, the 2013 tax rate for an individual making $8,925 to $36,250 is 15 percent. Therefore, profits on investments sold less than a year after the initial purchase will be taxed at 15 percent. Smaller businesses and medical practices (those earning less than $400,000 per year) can offset any potential capital gain taxes by charging day-to-day expenses on a small business credit card and using their statements to keep track of expenses incurred for that year.
Long Term Gains
A long-term capital gain is profit made from an investment held for more than one year. The fiscal-cliff compromise ended a zero percent long-term capital gains rate for the $0 to $36,250 income brackets, which was in effect from 2008 to 2012. There was previously a 15 percent long-term rate for all earners above the aforementioned threshold. All long-term investments, including property, are now taxed at a 20 percent rate. The Affordable Care Act also tacks on an additional 3.8 percent Medicare surtax on capital gains for those making over $400,000 as individuals. The 23.8 percent rate, including the surtax, is the highest rate on capital gains since the Clinton Administration. It is also somewhat of a double-dip into the pockets of many medical professionals. The 2.3 percent MDET, the 8.8 percent long-term capital gains increase on $400,000 per year or more earners, and the 35 percent to 39.6 percent increase on income taxes, all effect a vast majority of the aforementioned individuals.
The Precious Metal Exception
The Internal Revenue Service requires everyone to report all capital gains, including winnings from lotteries and other forms of gambling. The one type of investment exempted from any and all capital gains by federal law is precious metals. The caveat here is that the actual gold, silver or platinum bullion is exempt, while precious metal ETFs and funds are not. For instance, if you owned 20 ounces of gold in the form of ETF shares in 2003, you will turn a 500-plus percent profit on the investment today. The 20-23.8 percent tax will apply to the shares, but not on physical gold bars and coins that you purchased at the same time. It behooves those who have been most effected by tax increases (medical practitioners) to diversify and avoid as many taxes as possible.