Now that the health care law has been declared constitutional, the remaining provisions will be going into effect. One little known provision is a new 3.8 percent investment income surtax, also called the health care surtax or the Medicare tax; it will go into effect on January 1, 2013.
This new surtax will be assessed on the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over the “threshold amount.”
For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; all other individual taxpayers, $200,000. For trusts and estates, it is the beginning of the top income tax bracket ($11,650 in 2012).
Stated another way: 1) If your modified adjusted gross income (MAGI) is less than or equal to the threshold amount that applies to you, you will not pay this tax. 2) If your modified adjusted gross income (MAGI) is greater than the threshold amount that applies to you, you will pay the 3.8 percent tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount.
Note that the surtax liability is determined on income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital gain rate is scheduled to increase for high-income taxpayers to 20 percent in 2013, so the total tax on capital gains (with the surtax) could be 23.8 percent in 2013 and beyond.
The good news is that there are some steps you can take this year to help you avoid or reduce the amount of surtax beginning in 2013. Also, 2012 is an exceptional year for estate planning in general. The federal estate tax exemption is $5.12 million, which allows a married couple to transfer as much as $10.24 million from their estate with no estate tax. Under current law, this exemption is scheduled to shrink to $1 million in 2013.
Should this surtax cause widespread panic and outrage? No. I am not going to discuss the politics surrounding the healthcare act. However, the general population of our area should not be worried about this surtax.
Remember, there is only a surtax if your MAGI is over the threshold amount listed above. As a result, I think it is safe to say that many of us have nothing to worry about. For the ones that are above the MAGI threshold, proper planning can reduce their tax exposure.
Editor’s Note: Melanie B. Bradford is an attorney located in Scottsboro, Alabama at 803 Garland Ferry Road at the intersection of Veterans Drive and Garland Ferry near The Daily Sentinel. Her phone number is 256-259-3301. The Alabama State Bar requires any communication that may be interpreted as an ad to state: “No representation is made about the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”