Plan Now, 3.8% Surtax Begins in 2013

doctor holding up xraysOne tax element of the Affordable Care Act begins January 1, 2013 and may affect your 2012 year-end tax planning. The new 3.8% Medicare contribution surtax will apply to either your “investment income” or the amount of your modified adjusted gross income (MAGI) in excess of the thresholds, whichever is smaller. Therefore, taxpayers who have no investment income or MAGI under the threshold amounts will not be subject to the new surtax. The MAGI threshold limits are $250,000 for joint filers and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for all others. Net investment income is broadly defined as the sum of interest, dividends, annuities, royalties, rents, income from a passive business, capital gains and other net gains from the sale of property not used in a trade of business, as well as, the trading of financial instruments and commodities. Personal residence gain exclusion under § 121, is NOT included in the calculation of investment income. In a nutshell, small business owners who expect to have MAGI above the threshold limits need to plan ahead for the Medicare surtax.
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