August 6, 2012

Planning for the 3.8% Surtax

After the Supreme Court upheld the 2010 Health Care Act, citing its constitutionality as a tax, prudence dictates determining if it applies to you and if this additional tax can be avoided.


By definition, the surtax will be based on the lesser of your net investment income or your Modified Adjusted Gross Income (MAGI) over the applicable threshold.


Those thresholds are –

Single filers –                           $200,000

Joint filers –                              $250,000

Married filing separate –          $125,000

Trusts and estates –                 $12,000 inflation adjusted bracket


Starting January 1, 2013, if your MAGI exceeds the respective threshold (shown above), you COULD get hit with the Surtax.


Our friends at the Treasury define investment income as –

  • ·         Interest
  • ·         Dividends
  • ·         Capital gains
  • ·         Rental and royalty income
  • ·         Distributions from non-retirement plan annuities

While distributions from IRAs (or conversions to Roth IRAs) are not considered investment income, they along with any other income, can push you over your threshold.


Below are some examples from tax commentators Ed Slott and Robert Keebler.

  • ·         A single female taxpayer has $225,000 of net investment income. The surtax would apply to the $25,000 over her threshold of $200,000.
  • ·         A couple has MAGI of $300,000 with $52,000 of net investment income. The surtax would apply to $50,000, which is the lesser of net investment income ($52,000) or the amount over their threshold ($300,000 minus $250,000).

What To Do

There are two fronts that can be attacked: reducing overall income (MAGI) and/or reducing net investment income. What can be done will depend on your situation. Below are a few possibilities.


  • ·         Maximize your deferrals to employer retirement plans, IRAs and deferred compensation arrangements.


  • ·         Carefully consider Roth conversions in order to reduce minimum distributions down the road.


  • ·         Think of 2012 as the Year of the Gift (gift tax exemption is $5,120,000 ) to family members and to charities.

These tactics and others are extremely dependent on your situation, both now and in the future. Be sure to thoroughly discuss them with competent and knowledgeable tax advisors.

Current News

On August 2, the Senate Finance Committee voted 19 to 5 to report out of committee amendments to the Family and Business Tax Cut Certainty Act of 2012. This bill would extend many, but not all, tax cut provisions expiring at the end of 2012. Unfortunately, we may not know what provisions will be retroactively retained until late this year. The Senate will take up the measure after their August recess, and the House may not consider it till after their November recess. The major item here is for IRA owners age 70 1/2 to direct required minimum distributions to charitable organizations, in lieu of including in income.

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