Are You Prepared for the 3.8% Medicare Surtax?

The Medicare Surtax is sure to take many by surprise.  Planning now for the 2013 tax year is imperative! For individuals, the amount subject to the tax is the lesser of:

  1. net investment income (NII)
  2. the excess of a taxpayer’s modified adjusted gross income (MAGI) over and applicable threshold amount.(MAGI) is generally the amount youreport on the last line of oage 1, Form 1040.


  • dividends
  • rents
  • interest
  • passive activity income
  • capital gains
  • employment income
  • income from an active trade or business
  • gain on the sale of an active interest in a partnership or S corporation
  • IRA or qualified plan distributions
  • income from charitable remainder trusts
Threshold Amount:
  • Married Taxpayers Filing Jointly –  $250,000.00
  • MarriedTaxpayers Filing Separately –  $125,000.00
  • All Other Individual Taxpayers –  $200,000.00
So how do you calculate this?
Here is an example:
Al and Barb, married taxpayers filing separately, have $300,000 of salary income and a net investment income of $100,000.  You then need to evaluate if the amount subject to the surtax is
  1. The Net Investment Income (NII) $100,000
  2. The excess of their Modified Adjusted Gross Income (MAGI) $400,000
Because the Net Investment Income is the smaller amount ($400,000-$250,000= $150,000)this will be the base in which the tax is calculated.So the surtax payable will be $3,800 (.038 x $100,000).
10 Effective Strategies to Reduce MAGI and/or NII
  1. Roth IRA Conversions
  2. Tax Exempt Bonds
  3. Tax-deferred Annuities
  4. Life Insurance
  5. Rental Real Estate
  6. Oil and Gas Investments
  7. Timing Estate and Trust Distributions
  8. Charitable Remainder Trusts
  9. Installment Sales
  10. Maximizing Above-The-Line Deductions
We would be happy to explain how these strategies may save you large amounts of surtax.