Taxpayers should be aware of a new tax provision, the Unearned Income Medicare Contribution, that takes effect this year. Included in the Patient Protection and Affordable Care Act, it places a new 3.8% Medicare “surtax” on net investment income. This tax will apply to all taxpayers whose incomes exceed certain thresholds. For individual taxpayers the thresholds are:
- $250,000 Married Filing Joint
- $125,000 Married Filing Separate
- $200,000 Single and Head of Household
The Medicare Surtax is calculated on the lesser of Net Investment Income or the excess of Modified Adjusted Gross Income over a threshold amount. Net investment income includes interest, dividends, non-qualified annuity distributions, rents, income from passive activities, capital gains, royalties, and bonus payments for gas or oil leases.
John and Mary are a married couple. In 2013 they receive $150,000 in wages ($75,000 each), $15,000 rental income and $250,000 from a lease bonus payment from a gas well. John and Mary’s Medicare surtax would be computed as follows:
This new Medicare Surtax will be reported and paid on form 1040 for individuals and form 1041 for estates and trusts. This tax is also subject to the estimated tax provisions and could be subject to penalties if not paid within those provisions.
As the above example illustrates, the new Medicare Surtax could have a huge impact on certain taxpayers. I would urge any taxpayer with net investment income or Modified Adjusted Gross Income over the threshold to contact Levin Swedler Kennedy or their tax professional prior to year end.
Written by: Fran Taylor, CPA