Tue, December 06, 2011
In the midst of gripping near-term news of deficits and economic crises, taxpayers may not be aware that a looming tax on investment income will begin to nick higher-income earners starting in 2013.
The new tax is actually a Medicare tax, set to hit individuals with incomes over $200,000 and joint filers with incomes in excess of $250,000. The calculation of the tax will be a bit complex, as the tax applies to the lesser of: (1) modified adjusted gross income (MAGI) in excess of the threshold amount, or (2) net investment income. Investment income includes interest and dividends, capital gains, annuities, rents, and royalties. Municipal bond income and the excluded portion of the gain from the sale of a personal residence would not be included in net investment income.
For example, a couple with earned income of $220,000 and investment income of $50,000 would have to pay the new 3.8% tax on on $20,000, the amount of MAGI over the $250K threshold. If the earned income were $260,000 and investment income were $10,000, the tax would apply only to the $10,000 amount.
There’s a good chance that this tax is here to stay, as it will raise significant revenue for Medicare and is targeted to affect higher-income families. The new tax may encourage more investors to hold income-generating investments in tax-deferred accounts – a good strategy generally anyway, but more critical in light of the new tax.