Will I be subject to the3.8% Medicare surtax in January 2013?

Beginning January 1st 2013 the 3.8% Medicare surtax will officially be in effect. Simply, the tax will be imposed on the lesser of:

  1. Net investment income or,
  2. Modified adjusted gross income (MAGI) over 200,000 for single filers and 250,000 for married filers.

Think about that with a few examples:

  • Taxpayer 1, a single taxpayer, has $250,000 of net investment income and $50,000 of wage income giving a total MAGI of $300,000. The 3.8% tax will apply to $50,000 of income. (Lesser of $50,000 of $250,000).
  • Taxpayer 2, a single taxpayer has $500,000 of wage income and $100 of net investment income. The 3.8% surtax will apply to only $100 of income.
  •   Taxpayer 3, a single taxpayer, has wage income of $300,000 and net investment income of $100,000. The 3.8% surtax will apply to $100,000 of income. (Lesser of $100,000 and $200,000).


In order to reduce the surtax basically you need to reduce your investment income or your total AGI. A few tax planning ideas to reduce the 3.8% medicare surtax are as follows:

  • Roth conversions. Large IRA distributions can easily put AGI over the threshold amount. Roth distributions will not increase your AGI.
  • Large capital gains. Make sure not selling securities without first looking at your tax scenario.
  • Timing outlier events that may increase AGI such as sales of a business or sales of your residence or rental properties. If any of these events can take place prior to January 2013, do it. If not, make sure your accountant is apprised to the situation to determine if any planning can be done to reduce the tax exposure.
  • Tax exempt bond interest is not considered net investment income and also will not increase your AGI. This means tax exempt bonds may prove to have higher yields in after tax dollars to taxpayers who, on the margin, are subject to the tax.
  • Life insurance – Basis of life contracts are withdrawn first and do not count towards your AGI.
  • Charitable remainder trusts – Allow for the deferral of income over a period of time while dividends and gains held within the trust are exempt from the surtax.

Contact us for more information.

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