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

Our final tax tip is here for strategizing against the 3.8% Medicare tax to fund Obamacare.

As we indicated in our previous blogs, the additional 3.8% tax on investment income, commencing 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.

Consider installment sales – Installment sales can be used to limit the amount of net investment income recognized in the year of a sale of a business and in subsequent years. Installment sales can only be used in certain sale situations as it depends on the type of assets sold. If a taxpayer was “active” in the business that was sold, the gain would not be considered net investment income; however, it would be factored into the MAGI calculation. If there is an opportunity to sell a business prior to 2013, it may be advantageous as a taxpayer would escape the 3.8 percent surtax and potentially benefit from lower capital gain rates.


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