Medicare surtax. Additional medicare tax of 0.9% applies to compensation over $200,000 for married taxpayers, $250,000 for marrieds filing jointly, and $125,000 for marrieds filing separately/single.
There is no wage limit for Medicare. Current Medicare tax rate for 2012 is 1.45%. The additional medicare tax will boost the rate to at least 2.35% once the compensation threshold is reached.
Medicare tax on unearned income. A Medicare surtax of 3.8% will apply to marrieds with AGI over $250,000 and singles with AGI over $200,000. The surtax is effective on the lower of the taxpayer's net investment income or on the AGI over the threshold.
Investments subject to the surtax:
- Interest and Dividends
- Capital Gains
- Annuities
- Royalties
- Passive real-estate income
Investment income exempt from the surtax:
- Tax-free bond interest
- Distributions from qualified retirement plans (401(k)s
Example: A single taxpayer has an AGI of $220,000 which includes investment income of $30,000. The excess of AGI of $20,000 is lower than $40,000 investment income, therefore the medicare surtax is imposed on $20,000. Surtax: $20,000 x 3.8% = $760.
Investment Strategies for Consideration for AGI Above Thresholds:
- Purchased tax-exempt bonds
- Sell assets in 2012 instead of 2013 or 2014
- Convert traditional IRAs to Roth IRAs to reduce AGI in the future
Itemized Medical Expenses increased to 10% above AGI. The current 7.5% limit will be increased to 10%, except for taxpayers over 65 years of age or older.
Visit my website: KC Accounting
