Newsletter – September 2013
Medicare Surcharge Tax
One of the significant changes to the tax code taking effect in 2013 is the implementation of the medicare surcharge tax. This new tax was added to the code as part of the healthcare reform act that was passed in June 2010. This additional tax was added to assist in paying for the health insurance mandate.
What is the tax?
The medicare surcharge tax is a tax on investment income only. You could say that the tax is essentially an investment tax. The new tax took effect as of January 1, 2013 and the tax is to be assessed on individual, trust, and estate taxpayers only. The type of investment income that this tax will be assessed on will include interest income, dividend income, capital gains, passive gains, passive income from rents and royalties, and various types of annuity income. Essentially for the tax to be considered investment income it cannot be active or business income.
How is the tax calculated?
The medicare surcharge tax has a tax rate of 3.8%. How the tax will be calculated will depend on your filing status, if you have investment income, and your level of income. If you have a filing status of married filing joint and your adjusted gross income exceeds $250,000 then the tax is calculated by taking the lesser of multiplying 3.8% by the amount of adjusted gross income that exceeds $250,000 and taking the investment income and multiplying the income by 3.8%. For example, if you have a married couple who has adjusted gross income of $280,000 of which $20,000 is dividend income then the tax would be calculated as follows: $280,000 less $250,000 = $30,000 x 3.80% = $1,140 and $20,000 x 3.8% = $760. In this example the medicare surcharge tax would be $760 because it is lesser than $1,140. If you are an unmarried filer then the adjusted gross income threshold is $200,000. For trusts and estates the income threshold is much lower currently scheduled to be $11,000.
What to do
The takeaway with this new tax is that it adds another layer of complexity to an already complex tax code. There will significant tax planning for high income tax payers who have considerable investment income. The bottom line is that if you have total income less than $200,000 to $250,000 you have nothing to worry about. But if you do have income that exceeds these thresholds and in addition you have investment income then you may want to consider some tax planning to minimize the tax effects of this new tax.