Tax & Accounting Blog

Medicare Surtax on Net Investment Income Goes into Effect on January 1, 2013

1042-S, 1099, Cost-Basis Reporting, Document and WorkFlow Management, Information Reporting for Wealth Management, International Reporting & Compliance, ONESOURCE, Tax Information Reporting, Trust Tax, Trusts, W-8 & W-9 Foreign Reporting, Withholding Management July 19, 2012

Under the 2010 Health Care reform legislation, a Medicare tax will, for the first time, be applied to investment income beginning in 2013. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from the disposition of property other than property held in a trade or business. Net investment income is reduced by deductions properly allocable to such income. However, the new tax won’t apply to income in tax-deferred retirement accounts, such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000 / $250,000 thresholds. So, if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.

For an estate or trust, the surtax is 3.8% of the lesser of: (1) undistributed net investment income; or, (2) the excess of AGI over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins. The tax does not apply to a nonresident alien, a trust in which all of the unexpired interests are devoted to charitable purposes, a trust that is exempt from tax under Code Sec. 501, or a charitable remainder trust exempt from tax under Code Sec. 664.

The Supreme Court is expected to rule on challenges to the Health Care reform legislation by the end of June. If the Court decides that the entire law is invalid, then the Medicare surtax on investment income will not go into effect without further action from Congress.