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

A provision of President Obama’s health care law imposes a second Medicare tax on investment income for Americans classified as wealthy, effectively raising taxes on investment income and taxing investors twice.

As we indicated in our previous blogs, the additional 3.8% tax on investment income, starting soon in 2013, affects individuals 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.

Because income from tax-exempt and tax-deferred vehicles like municipal bonds are not included in investment income, shifting your investments to these types of vehicles now, may become more favorable.

Charitable remainder trusts should also become more appealing because they permit taxpayers to defer income over a period of time, enabling them to stay under the threshold amount.

 

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