“How will this affect my taxes?”
New Medicare Tax
There will now be a 3.8-percent Medicare tax assessed on the lesser of either your “Net investment income” or the excess of your “Modified Adjusted gross income” over the “threshold amount”.
What is “Net Investment Income”?
“Net investment income is the amount by which the sum of gross investment income and the capital gain net income exceeds the allowable deductions.”
Items included in your “Net investment Income” for the purpose of the new tax are as follows:
1. Interest
2. Dividends
3. Capital gains
4. Annuities
5. Rents
6. Royalties
7. Passive activity income.
Items that are not included in “Net investment income” are the following:
1. Active trade or business income
2. Interest, dividends, capital gains, annuities, rents, royalties, passive activity income if it is derived in an active trade or business.
3. Distributions from IRAs or other qualified retirement plans
4. Any income taken into account for self-employment tax purposes
What is “Adjusted Gross Income (AGI)”?
“Adjusted gross income is defined as gross income minus adjustments to income.
What is “Modified Adjusted Gross Income (MAGI)”?
“Modified adjusted gross income is your adjusted gross income (AGI) plus deductions, such as college loan interest and contributions to a deductible individual retirement account (IRA)
What are the threshold amounts?
1. Married filing jointly: $250,000.
2. Married filing separately: $125,000
3. Not married and filing individually: $200,000
If your MAGI is less than the “threshold amount” the 3.8-percent tax will not apply. However if your MAGI is greater than the “threshold amount”, it is possible that the 3.8-percent tax will apply.
Tips and considerations for possibly working around this new tax are as follows:
1. Make Tax-exempt/tax-deferred investments (e.g. Municipal bonds, Tax-deferred non-qualified annuities, Non-qualified deferred compensation (NQDC), Life insurance)
2. Roth IRA conversions and distributions do not count towards MAGI.
3. Contribute to qualified retirement plans (e.g. 401(k), IRAs, 403(b))
4. Charitable remainder trusts will defer recognition of income over a period of time to
