3.8% Medicare Tax on Investment
Stevenson G. Smith, CPA
September 20, 2012
There has been a lot of information and misinformation
regarding the new 3.8 percent Medicare tax on investment income passed with the health care reform
package. The tax applies to the lesser of net investment income or modified
AGI (adjusted gross income) above $200,000 for individuals and heads of household, $250,000 for joint filers and
surviving spouses, and $125,000 for married filing separately.
The tax is effective in 2013.
For purposes of this tax the 3.8 percent Medicare tax
net investment income includes interest, dividends, annuities, royalties and rents and other gross income
attributable to a passive activity. Gains from the sale of property that is
not used in an active business and income from the investment of working capital are treated as investment
income as well. However, the tax does not apply to nontaxable income such
as tax-exempt interest or veterans’ benefits. Further, an individual’s
capital gains income will be subject to the tax. This includes gain from
the sale of a principal residence, unless the gain is excluded from income under Code Sec. 121, and gains from
the sale of a vacation home.
Net investment income is gross income or net gain,
reduced by deductions that are “properly allocable” to the income or gain. For passively-managed real property, allocable expenses will still include depreciation and
This law makes it imperative that records be kept of
items that increase your property’s basis. It puts the focus on investment
expenses that may reduce net gains: interest on loans to purchase
investments, investment counsel and advice, and fees to collect income. Other costs, such as brokers’ fees, may increase basis or reduce the amount realized from an
Example. Steve a
single individual, has modified AGI of $220,000 and net investment income of $40,000. The tax applies to the lesser of (1) net investment income ($40,000) or (2) modified AGI
($220,000) over the threshold amount for an individual ($200,000), or $20,000. The tax is 3.8 percent of $20,000, or $760.
Please contact our office if you would like to discuss
the tax consequences to your investments of the new 3.8 percent Medicare tax on investment income.
Call us at (801) 234-4202 anytime during business hours (8 to 5 Mountain Standard Time) to set up a
free consulation, or you can simply request a call from Steve using the convenient form below: