May 19, 2010
There are two Medicare surtaxes arriving in 2013........ beware.
The first is a 0.9% levy on earned income, covering wages and income from self-employment. Singles earning over $200,000 and couples earning over $250,000 will pay the 0.9% surtax. The second one is a special 3.8% Medicare surtax on unearned income. Singles with modified adjusted gross income over $200,000 and joint filers above $250,000 will get hit with the extra 3.8%. The surtax is levied on the smaller of the filer's net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but not tax free interest or payouts from retirement plans such as regular IRAs, Roths, or pension plans.
Tax-exempt bonds will become much more attractive to high income investors, since the interest is exempt from the surtax and doesn't add to AGI. Deferring compensation beyond 2012 may end up costing you. There is also a major marriage penalty in the surtax, since joint filers are clipped by the levy at far less than double the adjusted gross income threshold for singles. Trusts that accumulate income will be hit pretty hard by the surtax. The levy is the lesser of 3.8% of the trust's undistributed net investment income or 3.8% of the amount by which the trust's adjusted gross exceeds the threshold for the top trust tax bracket, which will begin at approximately $12,000 in 2013.
Converting to a Roth before 2013 will be more attractive. Although payouts from IRAs are exempt from the surtax, they are taxable and thus can boost your AGI and trigger the surtax on investment income. Roth payouts are typically tax free. It may be worthwhile to do some advance planning if you think this may impact you.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).