Watch Out For the New Medicare Surtax

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Medicad tax

The new Medicare surtax applies to the net investment income of single filers with a modified adjusted gross income over $200,000 and of couples over $250,000.  Those married filing separate are subject to the tax on income over $125,000.  Modified AGI is AGI plus tax-free foreign earned income.

The tax is due on the smaller of net investment income or the excess of modified AGI over the thresholds.  Investment income includes interest, dividends, capital gains, annuities, royalties, and passive rental income.  But tax-exempt interest income and distributions from 401(k)s, IRAs, Roth IRAs, and pension plans are not covered.

Tax Planning Is More Important Than Ever

If you think you are going to be subject to this tax, you must get help with tax planning.  Some of the steps you can take to reduce this new tax include using installment sale treatment to spread out the reporting of a large gain, or the use of a like-kind exchange to defer the gain.  You may also be able to include a pension contribution to reduce your AGI below the threshold amount.

These are just a few examples, so be sure to get help.  Otherwise you may be in for a nasty surprise when you file your tax return next year.