To help you celebrate the New Year, the Federal Government has added a new Medicare surtax on unearned income.
Going by the lofty name, the Unearned Income Medicare Contribution Tax, the new tax is imposed on the unearned income of individuals, estates, and trusts.
For individuals, the surtax is 3.8% of the lesser of:
1. The taxpayer’s net investment income or
2. The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).
“Net” investment income is investment income reduced by allowable investment expenses. Investment income includes income from interest, dividends, annuities, royalties, rents (other than those derived from a trade or business), capital gains (other than those derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to the trading of financial instruments or commodities.
For surtax purposes, modified adjusted gross income does not include excluded items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gains from the sale of a principal residence.
In order to avoid or minimize this new tax, higher income taxpayers may wish to alter their investment portfolios to include more of the non-taxable investments mentioned above.
Homeowners should be aware that the gain from the sale of their primary home in excess of the homeowner’s gain exclusion or gain from selling a second home is treated as investment income and would be subject to this new tax.
Contact our offices to discuss how you might plan your finances in light of this new tax.