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The United States government currently imposes a Medicare tax of 2.9% on wages received by an employee, and on business income earned by self-employed individuals.
Starting January 1, 2013, this Medicare tax will be increased to 3.8% for higher-income individuals and expanded to cover investment income.....
Adjustable Gross Income Thresholds
Taxpayers with adjustable gross incomes over the following amounts could be subject to this new tax:
- $250,000...married filing joint & qualifying widow filers
- $200,000...single & head of household filers
- $125,000...married filing separate filers
Defining Investment Income
Investment income (or “unearned” income) is the income that an individual derives from investing capital. This includes the following:
- Capital gains *
- Rents received
- Dividends & Interest
* If certain restrictions are met, some capital gains may be excluded from the sale of a principal residence up to $250,000 for single filers and $500,000 for married filers.
Suppose John and Jane Doe are married and file a joint tax return. They have $275,000 in combined salary income and $75,000 of net investment income from dividends, interest, and capital gains. Their adjusted gross income is $335,000.
Step 1: Calculate net investment income = $75,000
Step 2: Calculate adjusted gross income in excess of the threshold = $85,000
($335,000 - $250,000 = $85,000)
Step 3: Use the lower of #1 or #2 above = $75,000
Step 4: Multiply $75,000 by 3.8% = $2,850
Higher income individuals may want to do some calculations to see if this tax will affect their finances. Below are a few tax planning strategies for those this tax will affect. **
1) Offset capital gains with capital losses to reduce net gains
2) Shift income-producing investments into tax-sheltered plans such as 401k’s and IRA’s
3) Advance capital gains by selling in 2012
** Always check with a tax advisor regarding your specific situation. Each situation is unique and requires personal attention.
Contact me if you have any questions about how this may apply to you. And please feel free to forward this information to a friend, family member, or coworker you think this may help!