Additional Medicare Tax Coming in 2013
Beginning in 2013 a new 3.8% tax will apply to the “unearned” income of “high income taxpayers”. An additional 0.90% tax will apply to the “earned” income of many of these same individuals. Both taxes are referred to as “Medicare” taxes.
For purposes of this new “Medicare” tax, high income taxpayers are defined as:
- Single taxpayers with Adjusted Gross Income (AGI) in excess of $200,000
- Married couples filing a joint tax return with AGI in excess of $250,000
NOTE: These AGI amounts are not indexed for inflation
Unearned income is defined as the income that an individual derives from investing his / her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business.
- The new 3.8% Medicare tax is assessed only when AGI is more than $200,000 single / $250,000 married filing joint.
For example, if a single individual has AGI of $275,000, then the excess over $200,000 would be $75,000. Assume that this individuals net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Therefore, in this example, the 3.8% tax is levied against the $60,000.
KEY PLANNING POINT: For those that are looking to diversify out of a concentrated, significantly appreciated stock position, it makes sense to consider doing so in 2011 or 2012, given that upcoming increase in the Medicare tax (due in 2013) along with that anticipated increase in the long-term capital gains tax rate (also anticipated to take effect in 2013).