Welcome to Tax Tip Tuesday, Ryun Givens & Company's video tax blog by Curt Brand. Every Tuesday we will look at an area of taxation to provide you with knowledge and to help you plan for the future. Today’s topic is the Medicare surtax on investment income, which will have some Americans paying more in taxes next year.
The Patient Protection and Affordable Care Act contains two new Medicare taxes. Starting in 2013 there will be a new 0.9% tax on certain earned income and a 3.8% tax on certain unearned income. Today we will talk about the tax on certain unearned income.
Beginning in 2013, individuals, trusts, and estates who have Adjusted Gross Income in excess of certain amounts will face a surtax of 3.8% of net investment income. It is important to note that the application of this new tax revolves around a taxpayer’s Adjusted Gross Income or more specifically Modified Adjusted Gross Income. So planning to minimize or eliminate this tax comes down to controlling a taxpayer’s Adjusted Gross Income.
This new tax only applies to married couples filing jointly with Modified Adjusted Gross Income in excess of $250,000 or $200,000 for single taxpayers. For estates and trusts the amount is approximately $12,000. The tax is applied to the lesser of the net investment income or the Modified Adjusted Gross Income in excess of the these amounts.
Here's a simple example:
For a married couple filing jointly, if their Modified Adjusted Gross Income is $260,000 and that includes $20,000 of net investment income, they would have $10,000 subject to the new surtax. A single taxpayer with a Modified Adjusted Gross Income of $220,000 with the same net investment numbers would have $20,000 subject to the new surtax.
Net investment income for surtax purposes is interest, dividends, royalties, rents, gross income from a passive business activity, and net gain from disposition of property other than property held in a trade or business. Investment income is reduced by related deductions to such income to arrive at net investment income.
This barely scratches the surface of what, barring a repeal in the next Congress, promises to be a complicating tax factor for 2013 and beyond.
Disclaimer: The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.