Planning for the Medicare Surtax

Planning for the Medicare Surtax

If your clients had investment income in 2014, there may be something in their recently filed tax return they weren’t expecting – an additional tax. For individual taxpayers with an adjusted gross income of more than $200,000, or joint filing taxpayers with adjusted gross income of more than $250,000, the Patient Protection and Affordable Care Act created an additional tax of 3.8 percent on investment income, effective after Dec. 31, 2012.

The tax is levied on the lesser of:

  • Net investment income 
  • The amount by which their adjusted gross income exceeds the threshold limit of $200,000 or $250,000 respectively

Investment income specifically includes gross income from interest, dividends, annuities, royalties and rents. Investment income does not include distributions from qualified retirement plans, IRAs, gains on the sale of certain business interests, active trade or business income, or any income taken into account for self-employment tax purposes. 

Considering this new surtax on investment income and the additional tax burdens placed on high wage earners contained in the American Taxpayer Relief Act of 2012, it has become increasingly important to consider taxation when making investment and financial decisions. The sticker shock individuals are experiencing after reviewing their 2013 tax returns has resulted in an increased interest in tax-favorable strategies, such as maximizing qualified plan contributions, implementing non-qualified deferred compensation plans or contributing to charitable remainder trusts. Additionally, there has been an increased interest in taking advantage of the tax-favorable nature of cash value life insurance. 

Put it in Practice: The cash values inside life insurance policies grow on a tax-deferred basis and, when designed correctly, may be withdrawn free of income taxes. The new 3.8% surtax discussed above does not apply to life insurance cash values – make sure your clients know about this advantage.