Starting in 2013, beware of the stealth Unearned Income Medicare Contribution Tax that was part of the Health Care and Education Reconciliation Act of 2010.
Who will be subject to this new tax?
- Individuals
- Estates
- Trusts
The new tax is 3.8% of the lesser of “net investment income” or the excess of “modified adjusted gross income over a threshold amount.” The threshold amounts for the Stealth Tax are:
|
Taxpayer |
Adjusted Gross Income |
|
Filing Joint Returns |
$250,000 |
|
Married filing Separate |
$125,000 |
|
Filing Single |
$200,000 |
|
Estates and Trusts |
Dollar amount at which the highest tax bracket starts |
How is “net investment income” defined?
INTEREST, DIVIDEND, ANNUITIES, ROYALTIES, RENTS, CAPITAL GAINS
And INCOME FROM PASSIVE ACTIVITIES.
If you have a capital gain in 2013 or after the maximum tax rate would increase from 15% to 18.8%.
Example: Married
|
Wages |
|
|
$180,000 |
|
Net Investment Income |
|
|
|
|
Interest |
|
$80,000 |
|
|
Dividends |
|
15,000 |
|
|
Capital Gains |
|
40,000 |
|
|
Passive Activity |
|
20,000 |
|
|
Total |
|
|
155,000 |
|
Adjusted Gross Income |
|
|
$335,000 |
The unearned income Medicare tax of 3.8% is calculated as follows:
|
Method |
Income |
Tax @ 3.8% |
|
Net Investment Income |
$155,000 |
$5,890 |
|
Modified Adjusted Gross Income |
$ 85,000 |
$3,280 |
The stealth tax that you would pay would be $3,280.
Can this tax be reduced? With planning you could offset capital gains with capital losses. In the area of interest income, if you change the investment to tax exempt municipals, that interest would not be subject to the stealth tax. These may not yield as much as taxables, but after-tax might be better.
Needless to say with some planning you might be able to minimize or eliminate this tax. Don’t wait until 2013 to start thinking about it though–give us a call [1] so that we can assist you with this analysis.