The health care surtax started back in 2013 and helps fund the Affordable Health Care Act, or Obamacare, which provides Americans with affordable comprehensive health care, including covering pre-existing conditions. While the Obamacare mandate that everyone has to obtain health insurance or face a penalty has been repealed, this insurance still may be quite attractive for those with no other source of health insurance.
A flat surtax of 3.8% applies to investment income of married couples who have more than $250,000 of AGI, or single filers with more than $200,000 AGI. The 3.8% tax within certain limits only applies to the investment income above these thresholds.
Net investment income includes: interest, dividends, capital gains, rental and royalty income, and income from non-qualified annuities. It does not include wages, unemployment compensation, Social Security, alimony, self-employment income, or distributions from IRAs.
Here’s an example:
You and your spouse file a joint tax return. Assume your investment income is $50,000 and your MAGI is $270,000. The amount of your investment income subject to this tax is the lesser of (a) the $50,000 of investment income or (b) the amount of your AGI that’s above the $250,000 threshold. In this example, if your AGI is $270,000, then you’re $20,000 above the $250,000 threshold. So you would take the lesser of the $50,000 or the $20,000, which of course is the $20,000. Your tax would now be 3.8% of the $20,000, which is $760.
You can sometimes reduce or eliminate this tax by controlling “when” you trigger investment income. For example, a married couple could sell stock that would increase their investment income in a year when their modified gross income is well below the $250,000 threshold. Conversely, this couple could consider decreasing investment income in years when their MAGI exceeds the threshold.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.