Understanding the Medicare surtax

Sufficient tax planning is a core component of managing wealth, and it's important that affluent Americans who generate a certain level of income from earnings or investments are aware of a new tax that is likely to affect them this year. Many people are monitoring the ongoing situation surrounding the Patient Protection and Affordable Care Act. However, most are focused on the public exchanges and individual mandate, often overlooking a new tax that will be imposed on wealthy individuals.

The Medicare surtax - which has also been called the Medicare Contribution tax and the Investment tax - is a 3.8 percent charge levied against net investment income that went into effect at the beginning of the year. However, it will only affect higher-income individuals who meet the following modified adjusted gross income (MAGI) thresholds: $200,000 for singles, $250,000 for those who are married and filing jointly, or claiming the qualifying widow or widower status, or $125,000 for married couples filing separate returns. 

The tax applies to a broad range of investment securities, which range from stocks and bonds to commodity securities and specialized derivatives. It is the first surtax of its kind to be applied to capital gains and dividend income, Reuters reports.

How will the tax be levied?
It's important for those who may be affected by the Medicare charge to understand exactly how it will be applied to their income. The income amount subject to the 3.8 percent tax is the lesser of individuals' or joint filers' net investment income or the amount by which MAGI exceeds the applicable threshold. Forbes provided a helpful breakdown of how a person may be taxed under these rules. If a worker makes $150,000 per year and has a net investment income of $75,000, their MAGI would be $225,000. If the individual is filing as a single, they would be subject to the $200,000 threshold. Therefore, any amount that exceeds this benchmark - in this case, $25,000 - would be subject to the surcharge. 

When individuals bring in income from several different sources or a range of investments, it can get confusing to calculate how these amounts will be treated for tax purposes. Therefore, it can be rewarding and helpful for a person to speak with a professional tax preparer to get a better idea of the liability they might face. In addition, working with an experienced specialist can help people learn more about how taxes work, which allows them to continue planning into the future. 

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