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

As we indicated in our prior blogs, the additional 3.8% tax on investment income, will commence in 2013.  It applies to most joint filers with adjusted gross income above $250,000 and single filers with adjusted gross income above $200,000.

Adjusted gross income is the number at the bottom of the front page of form 1040; it includes interest, dividends, capital gains, wages and retirement income plus results from partnerships and small businesses, but it doesn’t include subtractions for itemized deductions such as mortgage interest and charitable gifts, or personal exemptions.

How does this tax work?  Here’s an example: John & Joanne are a married couple who file jointly. In 2013, they have $400,000 of adjusted gross income—$240,000 of wages plus $160,000 of investment income composed of interest, dividends and net gains from the sale of land. Because they have $150,000 of investment income above the $250,000 threshold, they would owe an extra 3.8% of that amount, or $5,700, in tax.

Tax tip #3: Whole life insurance may be a viable alternative for investments.  All of the growth will be tax-free if your policy is designed correctly.   Income earned inside your account is tax deferred until you withdraw it.  As long as total withdrawals don’t exceed your original investment, they’re considered a tax-free return of principal.

We have four more tips how to plan ahead to prevent this surtax; you can read about them in our next four posts!

Lefstein-Suchoff CPA & Associates, LLC, for all your tax planning & tax preparation needs.  Check us out at

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