Plan to Avoid the New Medicare Surtax
Previously, I’ve discuss how the new Medicare Surtax works and provided a few examples on how to calculate the amount to be taxed. This new tax is easily avoidable though with just a little planning. Again, it does not come into effect until January of 2013! Below are two examples which illustrate a quick way to avoid the tax:
1) Keith, a single man, has NII of $200,000 and a required minimum distribtion from his traditional IRA of $125,000. He will owe tax on $125,000 of income (lesser of 1) NII of $200,000 or 2) excess of $325,000 of MAGI over $200,000 threshold).
2) Kim, a single woman, has NII of $200,000 a distribution of $125,000 from her Roth IRA. She will not be subject to the tax (lesser of 1) NII of $200,000 or 2) excess of $200,000 of MAGI over $200,000 threshold). The key to this example is the fact that the distribution from the Roth IRA is NOT includible in MAGI. This may be something to contemplate in whether or not to convert to a Roth IRA.
While the new tax does not come into effect until January 1, 2013, it is never too late to start planning. You have some options – you can either convert to a Roth IRA to reduce your future MAGI or decrease your NII by changing your investment portfolio. If you are interested in learning more about the new Medicare surtax, please consult with a tax professional.
