3.8% Medicare Tax that medicare will never see the proceeds

You may have heard the following titles:

• The 3.8% Tax
• 3.8% Investment Tax
• 3.8% Medicare Tax
• 3.8% Medicare Contribution Tax
• 3.8% Medicare Surtax
• Unearned Income Medicare Contribution

They all are the same thing, however, we will refer to it as the 3.8% Medicare Tax. Amazing thing is that none of the income from 3.8% Medicare Tax gets deposited into the Medicare Trust Fund. It was actually passed by congress in 2010 for the Intent of generating $210 billion to Help fund Barak Obama’s Healthcare Reform.

The new 2013 tax is outlined in Code Sec.1411. This tax has serious implications for tax payers. IRS released the 100+ page document in December 2012. Code Section 1411 outlines the new tax will and will reflect on individuals, trusts, exceptions and definations that will help you gain knowledge of the 3.8% Medicare Tax.

While consuming some the information and how it is applicaple to your individual investments, keep an open mind to all your options. This new tax may be the deciding factor of where you place some of your investments so make sure you weigh all your options before investing. It may be time to shift to some other investment vehicles such as tax deferred or tax exempt investments.

When does the Tax go into Effect

3.8% Medicare Tax goes into effect on January 1, 2013. The NIIT will affect income tax returns of individual, estates and trusts for their first tax year beginning on or after January 1, 2013. It will not affect income tax returns for the 2012 taxable year that will be filed in 2013.

Thresholds you will want to keep in mind

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds

Filing Status                                                 Threshold Amount
Married filing jointly                                                             $250,000
Married filing separately                                                       $125,000
Single                                                                                      $200,000
Head of household (with qualifying person)                      $200,000
Qualifying widow(er) with dependent child                       $250,000

Examples:

• Net Investment Income (NII)
• Modified Adjusted Gross Income(MAGI)

MAGI (-) Fixed Threshold
Compared to NII
Which ever one is lesser then Multiply by 3.8% to equal your tax

Dominic makes                   $150,000/yr

NII                                          $ 80,000

MAGI                                     $230,000

(-) Threshold                       $200,000

NII                                          $ 30,000

                                                      (*) 3.8% = $1,140

What is included in Net Investment Income?

1. interest
2. dividends
3. capital gain
4. rental
5. royalty income
6. non-qualified annuities
7. income from business involved trading
8. financial instruments/commodities
9. business that are passive activities

Exempt Charitable

1. Grantor trust incomes passed through grantor
2. Simple trust
3. Distribute to beneficiaries

Following blogs will continue with Estate & Trust and how it effects Real Estate Investments.