Tax and Money Tip of the Week:
Part 1 – Effects of ObamaCare on your 2013 tax returns
March 5th, 2014 | No. 177

This is an overview of the tax changes in the Patient Protection and Affordable Care Act (ObamaCare) which will impact your 2013 tax return. This is part one of a two part series that will take a look at three key changes in the tax code this year.

Net Investment Income Tax

This new tax is also referred to as the 3.8% Medicare Surtax. This is a new “stand-alone” tax with its own set of rules.

There are three critical terms you need to understand to determine if you are susceptible to this additional tax:

–    Net Investment Income
–    Threshold Amount
–    Modified Adjusted Gross Income

Net Investment Income includes:  interest, dividends, annuity distributions, rents, royalties, income derived from passive activities and capital gains from the sale of some types of property.

Net Investment Income does NOT include:  salary, wages, bonuses, distributions from IRAs, income from self-employment, income from tax-exempt bonds and any gain from the sale of a primary residence.

Threshold Amount is $200,000 for individuals, $250,000 for married couples and $11,950 for estates and trusts.

Modified Adjusted Gross Income (MAGI) is essentially your regular AGI unless you had any foreign earned income exclusion.  In that case, the excluded foreign income would be added to your AGI to determine your MAGI.

The Medicare Surtax is equal to the 3.8% multiplied by the LESSER of: 1) Net investment Income, or 2) the excess, if any, of the MAGI over the threshold amount.

Example 1

Joe is single.  His AGI for 2013 is $300,000 which includes $50,000 of dividend income, $40,000 from a partnership in which he did not materially participate and $210,000 in wages from his employer.  Joe had no foreign income exclusion.

Modified Adjusted Gross Income            $300,000
MAGI threshold for single individual        (200,000)
Excess MAGI                                           $100,000

Dividend Income                     $50,000
Passive Income                        40,000
Investment Income                  90,000

Lesser of excess MAGI OR investment income is $90,000.

3.8% Tax X $90,000 = $3,420

Example 2

Same facts as Example 1 but Joe did not receive a $70,000 bonus that he anticipated, so that his wages were $140,000 instead of $210,000.

MAGI                                    $230,000
MAGI threshold                    (200,000)
Excess MAGI                          $30,000

Dividend Income                     50,000
Passive Income                       40,000
Investment Income                 90,000

Lesser of excess MAGI OR investment income is $30,000.

3.8% Tax X $30,000 = $1,140

This new tax is calculated on a new Form 8960.

Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.