Most of us are aware of the new federal income tax and federal estate tax rates that were enacted this January and that took effect in 2013. However, fewer are aware of the 3.8% Medicare Surtax on Net Investment Income ("NII") that was enacted as part of the Affordable Care Act. This new Surtax applies to individuals, trusts and estates. Whether this tax applies to you is based on two factors: 1) you meet certain minimum income level requirements; and 2) you have property that qualifies as NII.
First, the Surtax only applies to individuals who meet the following Modified Adjusted Gross Income ("MAGI") levels: 1) Married filing jointly or Qualifying Widower with Dependent Child with MAGI greater than $250,000; 2) Married Couples filing separately with MAGI greater than $125,000; 3) Everyone else with MAGI greater than $200,000. Once you determine that you meet these threshold income levels, then the analysis becomes whether you have property that meets the definition of NII. The IRS provides the following examples, which are not exclusive, of property that it considers NII: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of Internal Revenue Code ("IRC") Section 469). Excluded from NII are: retirement plan distributions, compensation income/salary, income on the exercise of compensatory options, and vesting of restricted stock. Note, however, that these types of income are taken into account for MAGI, which could ultimately trigger the Surtax. If you determine that you meet one of the MAGI thresholds and you have NII, then you may be subject to the Medicare Surtax. For a married couple filing jointly with MAGI over $250,000, they will be taxed 3.8% on their NII. For example, if the couple had $200,000 in salaries and $150,000 of NII for a total MAGI of $350,000, then $100,000 would be subject to the 3.8% surtax. It is critical to understand if the Medicaid Surtax applies to you it is a surtax in every sense of the word -- meaning it is in addition to any income tax liability that has been assessed under other provisions of the IRC.
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