Should I Be Worried About the New 3.8 Percent Medicare Surtax?

Joe Popp | October 10th, 2013

Obamacare is a complex piece of legislation. And in a recent ABC News/Washington Post poll, 62 percent of Americans said they lack information they need to understand Obamacare and how it will impact them. 

There are many facets of Obamacare – including a new 3.8 percent Medicare surtax on investment income for individuals. So are you subject to this additional tax? Two items determine if you are: net investment income (NII) and modified adjusted gross income (MAGI).

Understanding Your Exposure To The Medicare Surtax

NII includes, but is not limited to, interest, dividends, capital gains, rental and royalty income. MAGI is the total of your adjusted gross income and any tax-exempt interest income you have.

The 3.8 percent Medicare surtax is applied to the lesser of NII OR MAGI after being reduced by a threshold based on filing status. The thresholds are as follows:

  1. $250,000 for individuals who are married and file their taxes jointly
  2. $125,000 for individuals who are married and file their taxes separately
  3. $200,000 for all other filers

Lost? Here is an easier way to think of this. Imagine that you have a pitcher and you draw a line on that pitcher indicating $250,000. Then you pour in a quantity of water and a quantity of oil. The oil represents your net investment income and the water represents all other income you might have (like a W-2 wage).  To the extent the oil (which floats on top of the water) is over the $250,000 line, it will be subject to the 3.8 percent tax.

Medicare Surtax Scenarios

Here are a few scenarios that may help you better understand how the tax will be calculated:

  • Sam is a single taxpayer and had an annual salary of $175,000 and $50,000 of investment income in 2013. Sam’s MAGI is $225,000 ($175,000 + $50,000), and his NII is $50,000. After applying the filing status threshold, Sam’s 3.8 percent Medicare surtax will be applied to $25,000 ($225,000 – $200,000) of MAGI, which is less than his $50,000 of NII. Therefore, Sam will see a tax increase of $950 for 2013.
  • John is a single taxpayer and had an annual salary of $125,000 and $50,000 of investment income in 2013. John’s MAGI is $175,000 ($125,000 + $50,000), and his NII is $50,000. After applying the filing status threshold, John’s 3.8 percent Medicare surtax will be $0 since his MAGI is less than the $200,000 threshold even though he had $50,000 of NII.

Medicare Surtax Help

As I mentioned earlier in this post, Obamacare is complex, and the Medicare surtax can be as well. If you need assistance in determining your exposure to this tax, contact Rea & Associates. Our team of Ohio tax professionals can help you better understand your financial position as it relates to the 3.8 percent Medicare surtax. Make sure you understand what this new surtax means for you before it’s too late!

Matt Ganz, a principal with Rea & Associates contributed to this post.

 

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