Planning Briefs
3.8% Surtax Hits Passive Investors
Published Monday, July 1, 2013 at: 7:00 AM EDT
If you own a sizable interest in a business, you no doubt already pay close attention to the federal income taxes that your stake in the company generates. But now there’s a new tax wrinkle to contend with: the 3.8% Medicare surtax on investment income. Depending on your level of business activity, you might have to pay this new tax in addition to any other federal income tax you owe.
Beginning with the 2013 tax year, the 3.8% Medicare surtax applies to the lesser of (1) net investment income (NII) or (2) the amount by which your modified adjusted gross income (MAGI) exceeds a threshold amount. That threshold is $200,000 for single filers and $250,000 for joint filers.
NII includes items such as interest, dividends, annuity distributions, rents, royalties, and net capital gains on property you sell. Significantly for business owners, it also includes income derived from passive activities. Net investment income doesn’t include salaries, wages, or bonuses; distributions from IRAs or qualified plans; income used to calculate self-employment tax; gains from selling an active interest in a partnership or S corporation; and income from tax-exempt bonds and other items not subject to income tax.
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