Medicare Tax of 3.8% Set to Begin in 2013

Medicare and Retirement Planning

You may be hearing in the media about changes coming to Medicare in 2013. There are new Medicare-related taxes that are included in the recently enacted health-care reform legislation. These new taxes, which target high-income individuals and families, take effect in 2013. Although as we get closer to 2013 we will begin to receive more details, here’s a rundown of what you need to know.

Section 1402 of the Health Care and Reconciliation Act of 2010, which amends the Patient Protections and Affordable Care Act, outlines the new unearned income Medicare tax, and it goes into effect for years after December 31, 2012.

This Medicare contribution tax will be imposed on the unearned income of high-income individuals, estates and trust (although slightly different rules apply to estates & trusts). In the case of an individual, the tax is 3.8% on the lesser of net investment income or the excess of modified adjusted gross income over the threshold amount.

Net investment income (commonly: dividends, interest, annuities, rents & royalties, capital gains, as well as income from a business that trades financial commodities or instruments, or a business which would be considered a passive activity)

Modified adjusted gross income which exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return).

Basically, unless your adjusted gross income exceeds the thresholds above, you won’t be subject to the 3.8% tax. Keep in mind that interest on veterans’ benefits, tax-exempt bonds, and excluded gain from the sale of a primary residence that are excluded from gross income are not considered net investment income for purposes of this additional tax. Currently, there is an exclusion of $500,000 of gain on the sale of personal residences for a jointly filed return. IRA distributions and qualified retirement plans are also not considered investment income.

(Note: tax exempt income is used to calculate the tax on Social Security benefits, but not the Medicare contribution).

It is interesting to note that these two Medicare-related taxes will be expected to provide a significant source of revenue needed to fund other parts of health-care reform.

With all these Medicare changes on the horizon, it may make sense to review your investment holdings now to determine if tax harvesting is appropriate in 2012, and to what extent you may wish to reposition your savings for future protection.


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