The new Medicare surtax is a major source of funding for the recent health insurance reform.
The tax has two elements. A 0.9% surtax is added on earned income over $200,000 for single taxpayers and $250,000 for married couples filing jointly. There’s also a 3.8% surtax on unearned income (investment income) of taxpayers with adjusted gross income over $200,000 for singles and $250,000 for marrieds. This 3.8% tax is assessed on the lower of net investment income and the amount of modified adjusted gross income over the threshold amount.
Investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income. Distributions from qualified retirement plans (including IRAs), salaries, business income, and self-employment income are not included. Investment-related expenses are deducted to arrive at net investment income.
The taxes begin in 2013.
Strategies to avoid the taxes are to reduce adjusted gross income and net investment income. You can convert traditional IRAs or qualified retirement plans to Roth IRAs. You also can transfer to trusts income and assets from your estate. Insurance products, such as annuities and cash value life insurance, also can avoid the taxes. Tax-deferred retirement plans might defer the taxes in the short-term but trigger them later when required minimum distributions kick in.
July 2010 RW.