Strategies to Minimize Medicare Surtaxes

The Affordable Care Act created two new taxes which were assessed beginning in 2013. Most taxpayers chose to ignore the impact the new Medicare surtaxes would bring because they had hoped that the new law or some of its provisions would be successfully challenged in court or would be repealed by newly-elected politicians after the November election. Now that these options are no longer viable, taxpayers must develop strategies to minimize their tax burden. Have you?

The 3.8% Medicare surtax on net investment income will apply to individuals with modified adjusted gross income (MAGI) over $250,000 for married taxpayers filing jointly ($125,000 for married taxpayers filing separately) and $200,000 for taxpayers filing single or as head of household. The tax is imposed on the lesser of the individual’s net investment income for the tax year or MAGI in excess of the thresholds. Net investment income is the excess of the sum of the following, less any allowable deductions related to these items:

  • Gross income from interest, dividends, annuities, royalties, and rents unless derived in the ordinary course of a trade or business;
  • Other gross income from any passive trade or business or from a trade or business of trading financial instruments/commodities; and
  • Net gain included in taxable income that is attributable to the disposition of property (including the taxable gain on the sale of a personal residence) other than property held in a trade or business that is not passive or a business of trading financial instruments/commodities.

The 0.9% Medicare surtax on wages and self-employment income will apply to individuals in excess of the MAGI threshold amounts.

As a result of these two new taxes, taxpayers may need to:

  • Accelerate discretionary income to 2012 (e.g., taking additional salary or bonuses from closely-held corporations, selling investments with built-in capital gains, or exercising certain non-qualified stock options);
  • Defer deductions that could reduce their 2013 adjusted gross income; or
  • Accelerate itemized deductions before the “Pease Limitation” which reduces the allowable itemized deductions returns in 2013.

To take advantage of any or all of these tax saving strategies, quick action is imperative! It is essential to run the numbers before the end of the year so the taxpayer can take the appropriate steps to minimize the impact of these new taxes.

Contact Flexible Accounting Services of the Triangle today and let our experienced staff assist you in this critical tax planning process.