Tax Planning for the 3.8 Percent Medicare Tax: Tax Tip Number One

Nobody wants to pay more taxes, but for many of you, you may have no choice in this matter, thanks to Obamacare.  We decided to share some tax tips, in our next seven posts to try to help you plan better to avoid this particular tax commencing in 2013, and to preclude any surprises during your tax preparation.  Better you should be prepared beforehand, before you file your taxes.

As we indicated in our last blog, the additional 3.8% tax on investment income is part of the president’s Patient Protection and Affordable Care Act, and affects individuals Congress has decided are “wealthy:” single taxpayers with modified adjusted gross income (MAGI) of $200,000 or more and married couples with a MAGI of at least $250,000.

If you fall into one of these categories, you’ll pay 3.8% more in federal income tax on the lesser of your investment income or your “excess” MAGI- the amount that exceeds the $200,000 or $250,000 threshold.

Although income received from a pension, traditional IRA or company-sponsored retirement plan is not subject to the additional tax, it can push your other income above the threshold, exposing it to the surtax.

One way to avoid this is to see if you can convert traditional IRA’s to Roth IRA’s, as Roth IRA withdrawals aren’t subject to federal income tax.

 

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