3.8 Percent Surtax on Investments - The Truth is Out There
Neil Keller, CPA, Shareholder - Tax email | bio
December 2010
The Patient Protection and Affordable Care Act of 2010 includes a provision that imposes a new 3.8 percent surtax on unearned income of higher-income individuals starting in 2013. Recently I have received a great deal of email messages with misinformation about the rules and the calculation of the tax under this new provision. Numerous clients and referral sources have requested clarification and more information about the rules of this provision. To help you in your search for tax truth, here are some of the facts you need to know to better understand this upcoming surtax and hopefully plan accordingly.
The 3.8 percent surtax, also referred to as the Unearned Income Medicare Contribution (UIMC), applies to all tax years beginning after December 31, 2012, and is imposed on individuals, estates and trusts. For individuals, the tax is 3.8 percent of the lesser of either 1) net investment income or 2) the excess of modified adjusted gross income over the threshold amounts. The threshold amounts are as follows:
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$250,000 for a married couple filing a joint return or a surviving spouse;
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$125,000 for a married couple filing separate returns; and
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$200,000 for a single taxpayer.
Investment income for purposes of UIMC includes interest, dividends, capital gains, annuities, rents, royalties and passive activity income. Active trade and/or business income as well as distributions from IRAs or other qualified retirement plans would not be considered investment income. Also, for purposes of UIMC, gross income does not include interest on tax-exempt bonds, veterans' benefits and the excluded gain from the sale of a principal residence.
Example: A married couple filing a joint return has $220,000 in wages and $50,000 in dividends. The tax on this example would be calculated as follows: First, you would calculate the lesser of 1) $50,000 of investment income or 2) modified adjusted gross income of $270,000 less the threshold amount of $250,000 for married couples filing joint which results in $20,000. My vast tax expertise tells me that $20,000 is less than $50,000, so the tax would be $20,000 X 3.8 percent. This results in an additional tax of $760.
It is important to not be mislead by misinformation but instead to understand the rules so that you can factor it into successful tax planning. One situation where planning will be beneficial as it relates to UIMC is an installment sale. If you had an installment sale in 2010 or are contemplating one, it is important to consider the impact of the new 3.8 percent surtax in your calculations. For payments after December 31, 2012, both capital gains on the installment sale and interest income from the installment sale could be hit with additional tax. This could affect whether you elect out of installment sale treatment for tax purposes, restructure the transaction, or even change the purchase price or payment terms. Practically any investment activity can be affected by UIMC, so having knowledge of the rules and implementing a plan as we draw closer to 2013 will be crucial.
If you have any questions regarding the UIMC, please contact Neil Keller at nkeller@KolbCo.com or 262/754-9400, ext. 248.