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Income Tax Considerations for Individuals – Part 2 of 4

Your 2013 individual tax burden is comprised of more than the taxes currently paid on income and gains.  In 2013 you will also be hit with a 3.8% Medicare Contribution Tax. When you meet with your tax advisor, facts to have at hand include:


The additional 3.8% tax applies to Net Investment Income and it applies to individuals, estates and trusts. For individuals, the tax applies only if your Modified Adjusted Gross Income (MAGI) exceeds:

  • $250,000 if Married Filing Joint (MFJ)
  • $200,000 if Single or Head of Household
  • $125,000 if Married Filing Separately

MAGI is your Adjusted Gross Income (AGI), increased by the net amount excluded from foreign income under IRC Section 911(a).
The 3.8% tax will apply to the lesser of:

  • Net investment income  or
  • The amount of MAGI in excess of the thresholds listed above ($250,000; $200,000; $125,000)

Let’s look at two examples and ask a question:

Example 1: Taxpayer is MFJ.  They have $265,000 of MAGI in 2013.  Included in this is $60,000 of net investment income.  What amount is subject to 3.8% Medicare tax?

The taxpayer will pay the additional tax on $15,000.  They are comparing the amount their MAGI exceeds the threshold ($265,000 - $250,000 or $15,000) to the amount of net investment income ($60,000).  The tax is on the LESSER of the two.

Example 2: If the same couple has MAGI of $850,000 and $60,000 of net investment income, what amount is subject to 3.8% Medicare Contribution Tax?

The taxpayers must now pay the additional tax on the full $60,000 of net investment income.  They are now comparing the amount their MAGI exceeds the threshold ($850,000 - $250,000 or $600,000) to the amount of net investment income ($60,000).  In this case $60,000 is the lesser amount.  They will owe an additional $2,280, ($60,000 x 3.8%).

Please click here to view our Year-End Tax Planning series. 

Barbara Taibi is a Partner in the Personal Wealth Advisors Group with years of public accounting and income tax planning and tax return preparation experience. Barbara focuses on helping clients plan for and meet their financial and tax goals.

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