New taxes took effect this year as a result of the 2010 health-care reform legislation that may have an impact on tax-planning strategies.
As of January, the Medicare payroll tax increased to 2.35% from 1.45%. In addition, a 3.8% surtax on “net investment income” was also introduced to help fund health-care reform. Both taxes affect individual taxpayers with income over $200,000 and $250,000 for married couples.* For trusts and estates, the income threshold is $11,950.
Specific investment income is subject to the surtax
Investment income subject to the 3.8% surtax includes: taxable interest, dividends, capital gains, rental income, royalties, taxable portion of income from non-qualified annuities, and income resulting from a business activity where the taxpayer is not considered an “active” participant.
Some income is not subject to the tax
Some investment income is not subject to the surtax, including interest income from municipal bonds and distributions from retirement accounts like IRAs and 401(k)s. However, income from retirement distributions may cause a taxpayer to exceed the income threshold and expose other investment income to the surtax.
It is important to consult a financial advisor or tax professional to understand the impact of these new taxes on your personal financial situation.
*The threshold for the 3.8% net investment income surtax is $200,000 ($250,000 for couples) in modified adjusted gross income (MAGI). The 0.95 additional payroll tax is levied once an individual exceeds $200,000 ($250,000 for couples) in taxable salary and wage income. MAGI is defined as adjusted gross income plus the net foreign income exclusion amount.