Q: I am hearing so much about the new Medicare Tax. What is it exactly and how will it affect me?
A: This new tax is effective for taxable years beginning after December 31, 2012. On an individual basis, the new tax law imposes a 3.8 percent tax on the lesser of: 1) Net Investment Income, or 2) Modified Adjusted Gross Income in excess of $250,000 for married filing jointly and qualifying widows(ers); $125,000 for those taxpayers who are married filing separately, and $200,000 for all others, including single and head of household taxpayers.
Q: What is Net Investment Income?
A: The short answer is any income derived from the following sources: Interest, dividends, gains from the sale of investment assets such as stocks, bonds, mutual funds, etc., as well as royalty income, and all other passive income. This income is then reduced by investment related expenses such as investment interest, advisory and brokerage fees, and any other expense that can be properly allocated to the investment income.
Q: If I sell my house, does the gain on the sale count towards investment income?
A: Only the taxable portion of a gain on the sale of a principle residence is treated as taxable investment income. Federal and NJ tax laws allow an exclusion from income tax of $500,000 of the gain for married filing jointly taxpayers and $250,000 for single taxpayers.
Q: What can I do to help avoid or reduce the tax associated with this new law?
A: The easiest way to mitigate the effect of the new tax law is to keep income below the thresholds by deferring income when possible, utilizing strategies such as IRS Code Section 1031 Like-Kind Exchanges and the installment sales method of income recognition, if available. Taxable income can also be reduced by making contributions to retirement plans. Additionally, capital gains can be offset by the sale of investment assets, whose costs exceed sale proceeds, generating a capital loss.
Q: Where is this income reported on my tax return?
A: The income subject to the new Medicare Tax is recorded on Form 8960. This form has not been finalized by the Internal Revenue Service and is currently available only in draft version.
Mario Galazzo, CPA/CGMA is a member of the certified public accounting firm of Levine, Jacobs & Company, LLC. He can be reached at firstname.lastname@example.org.