The Medicare Tax is Coming!

The Supreme Court recently held that the Affordable Care Act (the new health care law) is constitutional. One of the more controversial provisions of the law, but which is not well known, is that a new 3.8% investment income surtax (the so-called “Medicare Tax”) will become law on January 1, 2013.

The 3.8% Medicare Tax will either be assessed against (1) your “net investment income,” or (2) the amount of your “modified adjusted gross income” (MAGI) if more than a certain “threshold amount,” whichever is less.

Next year, if you are married and filing jointly, the threshold amount will be $250,000. Married persons filing separately will have a threshold amount of $125,000, and single taxpayers will have a threshold amount of $200,000. So the Medicare Tax will only affect high earners, right?  Think again! For trusts and estates, the Medicare Tax will apply to any income that exceeds only $11,650!

For most married people, there will be no 3.8% Medicare Tax, unless their modified adjusted gross income (MAGI) is more than $250,000 in 2012. But if your MAGI is greater than the applicable threshold amount, then you will pay the new tax on whichever is less, (1) your net investment income, or (2) the amount of your MAGI over the threshold amount.

The new Medicare Tax will be based upon your income before any tax deductions. So even if your deductions put you in a lower income tax bracket, you would still have investment income that is subject to the Medicare Tax.

Moreover, the capital gains tax rate will increase to 20% in 2013, for high-income taxpayers, so the total tax on capital gains (including the 3.8% surtax) could be 23.8%, after this year.

About Paul D. Hunt

If you're a resident of California, and a homeowner, then you should clearly put your home into a living trust. A living trust makes probate unnecessary. (We don't like to say "avoiding probate," because that's misleading!) Probate is very expensive – an average home in Alameda will require a probate fee of about $37,000. Also, probate is very slow, and it's done in public. Our law office is dedicated to getting rid of all of the estate planning myths out there, like the "avoiding probate" myth. We want every family in Alameda to enjoy the many benefits of a trouble-free estate. Come to one of our seminars, or call for a free initial appointment at (510) 523- 2100.
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