Medicare Surtax On Investment Income - Beware!

The surtax calculation is based on two components:
 
   - The taxpayer’s net investment income (‘NII’) and,
   - The taxpayer's modified adjusted gross income (‘MAGI’).  
 
The 3.8% applies to the lesser of NII or adjusted MAGI. 
 
NII is the total of all taxable investment income, including interest, dividends, capital gains from investments, rental income, passive income, annuities and royalties. It does not include retirement plan distributions. MAGI is the total of NII plus all other taxable income not included in NII, such as wages and business income. Adjusted MAGI is MAGI reduced by:
 
   - $250,000 for married couples filing jointly
   - $125,000 for married couples filing separately
   - $200,000 for singles and head-of-household status
 
Clearly, if MAGI is not greater than the threshold amounts above, no surtax will apply. Also, if NII is low, the surtax will not be material. For clients with gross income approaching or exceeding the thresholds, minimizing investment income will be important. To minimize investment income, consider:
 
Harvesting tax losses
Choosing high cost lots on sales
Locating income-producing investments in retirement accounts
Using municipal bonds in taxable accounts
 
The most critical aspect for advisors: Be aware and proactively communicate with your clients!

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