Medicare Surtax Examples
A few days ago, I blogged about a new Medicare Surtax that was included in the recently signed Health Care Bill. For purposes of review, the taxable amount is equal to the lesser of 1) net investment income or 2) the excess of modified adjusted gross income over a threshold amount.
Investment income includes income sources such as interest, dividends, capital gains, annuities, rents, royalties and other passive activity income. Net investment income simply equals investment income minus investment expenses, lets call that NII.Modified adjusted gross income is your adjusted gross income plus the net foreign income exclusion amount, lets call that MAGI. Finally, the threshold amount is $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for single taxpayers. Here are a few examples on how to determine the amount that is taxable:
1) Matt, a single man, has $100,000 of salary and $75,000 of net investment income. His MAGI would be $175,000. Matt would not owe the additional tax because his MAGI is below the $200,000 threshold.
2) Lora, a single woman, has $250,000 of net investment income and no other income. She would owe the tax on $50,000 of income (lesser of 1) NII of $250,000 or 2) the excess of $250,000 of MAGI over $200,000 threshold).
3) Mark and Danielle, married filing jointly, have $500,000 of salaries and no NII. They will owe no tax because they have no NII.
4) Mike and Barb, married filing jointly, have $450,000 of salaries and $50,000 of NII. They will owe tax on $50,000 (lesser of 1) NII of $50,000 or 2) excess of $450,000 of MAGI over $250,000 threshold).
5) Doug and Darlene, married filing jointly, have $300,000 of salaries and $150,000 of NII. They will be taxed on $150,000 of income (lesser of 1) NII of $150,000 or 2) excess of $450,000 of MAGI over $250,000 threshold).
My next blog will show a few examples in which you can further avoid the new surtax and discuss some planning that cna be done to avoid the tax. Planning should start now!To answer any questions in regards to the new surtax, please consult with a tax professional.
