The first levy is a special 3.8% Medicare surtax on unearned income of single filers with modified adjusted gross income (AGI) over $200,000 and joint filers above $250,000. Modified AGI is AGI plus any excluded foreign earned income. The surtax is imposed 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 401(k)s, IRAs, Roths, profit sharing plans and defined benefit plans. So annuity payouts from retirement plans are exempt. A couple with $50,000 of investment income and AGI of $280,000 will pay $1,140 … 3.8% on the $30,000 excess over $250,000. A single taxpayer with AGI of $400,000 and $50,000 of investment income will pay an additional $1,900 … 3.8% of $50,000.
The surtax boosts the top rate on capital gains and dividends to 18.8%… the 15% nominal maximum rate that we expect will be in effect for 2013, plus 3.8%. If you sell your primary residence, only the portion of the profit over the $250,000 or $500,000 exclusion will be subject to the tax if your AGI is high enough to trigger it. The full profit on sales of rental properties and second homes can be hit by the surtax. And note that the taxable gain may push your income over the surtax thresholds.
So consider selling highly appreciated assets in 2012 instead of 2013.
The second levy is a 0.9% surtax on earned income … wages and income from self-employment. Singles will owe the extra 0.9% Medicare tax once total earnings are more than $200,000. Couples … over $250,000. So the effective Medicare tax rate on earnings over the thresholds will be 3.8% … the usual 2.9% rate plus an extra 0.9%.
This is another reason you may not want to defer compensation into 2013.
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