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%).
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