Year-end Planning Tips 3/10 - Medicare Surtax & Net Investment Income Tax

With all the uproar on the Affordable Care Act - the individual mandate and employer's requirement to provide health insurance for their employees have been on the forefront of the battlefield.  Surprisingly the Medicare Surtax and Net Investment Income Tax came into play without what would have been the expected pomp and circumstance.  Could it be that until people actually sit down and work through what these two taxes mean to their final tax bill for the 2013 tax year, will the reality of it all sink in.

Without too many financial changes most of us go on the assumption that our tax bill will be the same as last year but unfortunately this year there are two new taxes that require thorough tax planning before the close of year.  Some might say planning should really have started during the year as people made changes to their portfolios.

Net Investment Income Tax - 3.8% - using a Form 8960 (still in draft form) - will be used to report the income on the US Individual Income Tax Return beginning with the filing of the 2013 tax return.  Individuals with income threshold of $250,000 and up for those married filing jointly and $125,000 for single filers will be required to pay this tax on their investment income.  Investment income includes the following listed items but by no means limited to this list interest:

• Gains from the sale of stocks, bonds, and mutual funds.
• Capital gain distributions from mutual funds.
• Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
• Passive income - income from partnerships and S Corporations

All in all these are big changes that will have a sizable impact on one's tax bill and unfortunately are not only limited to individual income but also Estates and Trusts will be subject to the Net Investment Income Tax, if they have undistributed Net Investment Income.  The threshold for Estates and Trusts is $11,650.

Medicare Surtax - 0.9% - Since employers should have built into the withholding for all $200,000 threshold employees an additional 0.9% medicare withholding the people most impacted by this will be individuals have more than one job (two or three jobs accumulative income above the threshold).  These individual will not have made the necessary withholding adjustments.  Another group of tax payers that might be caught short here will be joint filers as your employers are not necessary going to make adjustments for income that is not earned through them.

Filing Status	Threshold Amount
Married filing jointly	$250,000
Married filing separately	$125,000
Single	$200,000
Head of household (with qualifying person)	$200,000
Qualifying widow(er) with dependent child	$200,000