The new health care laws implement a 3.8% surtax on net investment income starting in 2013. These new laws add a new tax system which can impact your household income tax bill in several ways. First we need to understand what is considered investment income and then we can navigate through several steps to see how this might affect our income tax situation.
Investment income includes: interest (not municipal bond interest), dividends, capital gains (long and short term), annuities (not those in IRA’s or company plans), royalty income, passive rental income, other passive activity income
Whether or not you are subject to the 3.8% surtax depends on the surtax income thresholds. You need to know the Modified Adjusted Gross Income thresholds to avoid the surtax. They are as follows:
Married Filing Jointly ($250,000)
Married Filing Separately ($125,000)
Trusts trigger the surtax at a much lower income level!
Review your taxable income. When you add up all of your taxable income sources you might find yourselves over the Modified Adjusted Gross Income (MAGI) threshold which causes your investment income to be subject to the 3.8% surtax.
Figure out how much will be subject to the surtax. The 3.8% surtax is assessed on the lessor of (1) net investment income or (2) the amount of MAGI in excess of the income thresholds noted above. If your MAGI is less than the stated income threshold you will not be subject to this surtax.
Other health care tax provisions for 2013. There is also an additional 0.9% Medicare tax on wages and self-employment income over the MAGI thresholds.
Some things to keep in mind. IRA and company plan distributions are exempt from the surtax; however taxable distributions from these accounts can push your income for the year above the MAGI thresholds retriggering the surtax. Roth conversions can push you above the MAGI threshold temporarily with increased taxable distributions and higher income. Contributions to a company plan (401(k) s for example) can reduce your MAGI for the 3.8% surtax but not for the 0.9% Medicare tax.