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Important Highlights about the 3.8% Medicare Contribution Tax Effective 2013

Under the 2010 Health Care Act a new 3.8% Medicare Contribution tax will be imposed beginning in 2013 on the Net Investment Income of higher income taxpayers. If a taxpayer has an adjusted gross income in excess of the following amounts then this new tax will apply:

Married Couple (filing a joint return) $250,000

Single or Head of Household 200,000

Married Individual (filing separately) 125,000

This 3.8% tax is levied on the lesser of a taxpayer’s Net Investment Income or the amount by which their adjusted gross income exceeds the thresholds indicated above. Net Investment Income consists of Interest, Dividends, Annuities, Royalties and Rents (unless they are derived from an active trade or business), income from passive activities as well as gains from the disposition of property to the extent that the gains are not excluded from tax. In the case of a home sale Net Investment Income would consist of any gain over the $250,000 ($500,000 for married couples filing a joint return) exclusion allowed for a principal residence owned for more than 2 years. Capital gains on the sale of a rental property would be fully subject to this tax.

For example a married couple with $300,000 of adjusted gross income with $200,000 from wages, $50,000 of dividends and $50,000 of taxable capital gains would have to pay $1,900 in Medicare contribution tax ($300,000 - $250,000 threshold = $50,000 which is less than their $100,000 of Net Investment Income)

The information and materials contained herein is intended to provide current and accurate information relating to the covered subject matter. It is provided with the understanding that the author is not rendering legal, accounting or other professional advice. If such advice is required, a professional advisor should be engaged. Furthermore, this article is not intended to be written or used, and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code, as amended or (ii) promoting, marketing or recommending to another party any transaction or tax-related mater(s).

Graff, Ballauer & Blanski, P.C.

Certified Public Accountants

847.881.2540

mblanski@gbbcpa.com