Health Care Reform Means Higher Taxes

The sweeping changes coming due to health care reform are going to have effects ranging far and wide. So what will this mean to you? Not all of the details are known yet, but one thing we know for sure is that higher taxes will be a part of it for many.

Beginning January 1, 2013,  a new Medicare surtax of 3.8% will be assessed if you have income over a “threshold amount”.  The new surtax will be assessed on the lesser of:

  1. “Net Investment Income” OR
  2. Any “Modified Adjusted Gross Income” over the “threshold amount”

Investment Income

OK, so what the heck does that mean?  First, investment income comes from a lot of sources.  Here’s what’s included in “investment income” for purposes of the 3.8% surtax:

  • Interest
  • Dividends
  • Capital Gains
  • Annuities
  • Rents
  • Royalties
  • Passive activity income

“Investment income” does not include:

  • Active trade and/or business income
  • Distributions from IRAs or other qualified retirement plans
  • Any income taken into account for self-employment tax purposes

Threshold Amount

The “threshold amount” is as follows:

  1. Married taxpayers filing jointly – $250,000
  2. Married taxpayers filing separately – $125,000
  3. All other individual taxpayers – $200,000
  4. Trusts and estates – $11,200

So if your MAGI is over the “threshold amount”, you will pay the 3.8% surtax on the lesser of all your investment income or on your income that in excess of the “threshold amount”.

Here’s what your new tax rates will most likely look like for Married Taxpayers Filing Jointly:



Taxable Income 2010 2011 – 2012 With Surtax 2013
$0 – $16,750 10% 15% 15%
$16,750 – $68,000 15% 15% 15%
$68,000 – $137,300 25% 28% 28%
$137,300 – $209,250 28% 31% 34.8%
$209,250 – $373,650 33% 36% 39.8%
Over – $373,650 35% 39.6% 43.4%

I know, clear as mud.  If this still does not make sense, and you think that you are pretty sure that your income is going to be close to or over the “threshold amounts” mentioned above, then you probably need to talk to a good Certified Financial Planner certificant, and also a good CPA.

There are a number of strategies you can use in your presonal financial planning to reduce or eliminate this excess surtax if you are someone who will be exposed to it.  If you are one of these people, you need to contact us as soon as possible to start planning ahead.  As I like to say, these are “high class” problems to have.

4 Responses

  1. Kristi
    Another great job - thanks for keeping us all aware of what's going on in the financial world.
    • Thanks Kristi. At least this tax won't hit everybody. But you probably noticed from the chart that EVERYONE will be paying income taxes at higher rates starting next year, no matter what your income is.
  2. Jane Parker
    This article has useful information that can be used in tax planning strategies. The table is an excellent source of information. Thanks Jane Parker
    • Thanks Jane. You can see in the table how everyone will be paying more in taxes starting next year. And this is probably just the beginning!

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