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With the Supreme Court’s decision this summer to uphold the constitutionality of the Patient Protection and Affordable Care Act of 2010, there are two new taxes, starting in 2013, that can impact individuals with income in excess of $200,000 and couples who earn more than $250,000.


To help offset the cost of insuring more Americans, the Medicare Hospital Insurance Tax was created. For earned income (wages and self employment income) that exceeds the thresholds mentioned above, you will incur an additional 0.9% tax. Income received from a pension, Social Security or an IRA is not subject to this tax.

Currently, there is a 2.9% Medicare tax on all wages. Half of this is paid by the worker and half by the employer. In addition, your employer will collect the new tax on income that exceeds $200,000.

One thing to keep in mind is that your employer will not be responsible for determining if your joint income will exceed the $250,000 threshold. This will cause additional tax due for some employees and a refund for others. For instance, two spouses could each earn $190,000 and not have the new Medicare Hospital Insurance Tax withheld, but end up with a tax bill for $1,170 on the $130,000 they earned over $250,000.


To help pay for the increasing costs of Medicare, a surtax of 3.8% will be imposed on the lesser of your net investment income or your Modified Adjusted Gross Income (MAGI) over $200,000 for single filers and $250,000 for married couples filing a joint return.

Investment income includes interest, dividends, capital gains, annuities, royalty income, passive rental income and other passive activity income. Distributions from IRAs, Roth IRAs, company retirement plans, and Social Security are not investment income, but can increase your MAGI to trigger the tax.

For example, if the couple mentioned above has an MAGI of $380,000 next year and their net investment income is $20,000, they will owe the tax. The $20,000 investment income is less than $130,000 they are over the MAGI threshold of $250,000, so they will owe 3.8% on $20,000 or $760. Overall, this couple will have paid an additional $1,930 in new Medicare taxes.

Fortunately, all our taxable portfolios are managed to be as tax efficient as possible, which can help to reduce the impact of the new investment surtax. We plan to discuss how you will be impacted at your next meeting and recommend you speak with your tax advisor as well.