By Sheryl Rowling
SAN DIEGO– Dear Money Maven,
What is the Medicare Surtax? How will I know if it will apply to me?
Worriedly,
Concerned Taxpayer
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Dear Concerned,
As of 2013, you might have been impacted by the by the 3.8% Medicare Surtax. You shouldn’t worry: you just need to know how the calculation works to determine if you will be affected and whether there’s anything you can do about it.
The surtax calculation is based on two components:
- Your net investment income (‘NII’) and,
- Your modified adjusted gross income (‘MAGI’).
The 3.8% applies to the lesser of NII or adjusted MAGI.
NII is the total of all taxable investment income, including interest, dividends, capital gains from investments, rental income, passive income, annuities and royalties. It does not include retirement plan distributions. MAGI is the total of NII plus all other taxable income not included in NII, such as wages and business income. Adjusted MAGI is MAGI reduced by:
- $250,000 for married couples filing jointly
- $125,000 for married couples filing separately
- $200,000 for singles and head-of-household status
Clearly, if MAGI is not greater than the threshold amounts above, no surtax will apply. Also, if NII is low, the surtax will not be material. If your gross income is approaching or exceeding the thresholds, minimizing investment income will be important. To minimize investment income, ask your investment advisor to consider:
- Harvesting tax losses
- Choosing high cost lots on sales
- Locating income-producing investments in retirement accounts
- Using municipal bonds in taxable accounts
Be sure to work with a knowledgeable CPA and investment advisor!
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com