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

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.

These thresholds are NOT indexed for inflation, thus, over time, more individuals may become subject to this tax.  Will you be one of them?  To help better plan to avoid this, please read our second tax tip below.

Tax-favored investment vehicles such as annuities are something pre-retirees might want to consider.  If you’re working and subject to the surtax, you might want to invest the low-risk portion of your portfolio in a fixed annuity.  Since the interest you earn is sheltered from federal tax (tax-deferred) until you take it out, you can choose to wait until after you retire to start withdrawals. By then, your income will likely have dropped below the surtax threshold.




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