ObamaCare Could Increase the Taxes You Pay
As a result of the Affordable Care Act (now law), commonly known as “ObamaCare” if you wait until 2013 to convert you could potentially pay an extra 3.8 percentage points in taxes.
ObamaCare levies a 3.8% tax on “investment income” if Modified Adjusted Gross Income (MAGI) exceeds $250,000 for a married couple or $200,000 for a single taxpayer. The tax applies to the portion of investment income that also exceeds the MAGI limit. For example if your MAGI is $280,000 and you have $20,000 in investment income you will owe the 3.8% ($760) on the $20,000 of investment income.
Now…IRA distributions are not subject to this surtax. So, there is no problem with an IRA conversion, right? You would think so, but you could be wrong. Your MAGI is increased by the amount of the IRA conversion. So, it may push other investment income over the MAGI limit and cause the surtax on that income.
As I have said many times, don’t let the tax tail wag the dog. But, if you are thinking about converting to a Roth and you have a significant amount in your Traditional IRA it might be a better idea to do it this year versus waiting until next year.