Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Aug 7

    with Ashley Brown

    Really… Another Tax? Sorry, but yes, the same people that brought you Obamacare ushered in the 3.8% Medicare Surtax, which took effect January 1, 2013. For the first time ever there is a Medicare surtax on your “net investment income” and capital gains from the disposition of property.  It does not apply to income from a trade or business or from the sale of property used in a trade or business. The Medicare Surtax applies to the lesser of your net investment income or the amount of “modified” adjusted gross income (AGI with foreign income added back) above a specified threshold.

    After you calm down from grumbling about a new tax, you might ask… What is “net investment income” (NII)? Net investment income is the gross income from interest, dividends, annuities, royalties, and rents provided the income is not generated in the ordinary course of an active trade or business. It is also gross income from a trade or business that is considered a passive activity, gross income from a trade or business of trading in financial instruments or commodities, and net gain from the disposition of property, other than property held in an active trade or business.

    How does it work? As stated above, the tax applies to the lesser of the taxpayer’s net investment income or the amount of “modified” adjusted gross income above certain thresholds. Those adjusted gross income thresholds are:

    • $250,000 for married taxpayers filing jointly or surviving spouse
    • $125,000 for married taxpayers filing separately, and
    • $200,000 for single and head of household taxpayers

    Example: A single taxpayer has modified AGI of $250,000, including net investment income of $30,000. The Medicare Surtax applies to the lesser of the net investment income ($30,000) or the excess of AGI over the applicable threshold ($250,000 – $200,000 = $50,000). Thus, the Medicare Surtax applies to $30,000.

    How can you avoid or minimize this new tax? In a word… planning. Plan ahead, consult with us, when you’re expecting a large windfall, or when selling long held investment assets. There are usually options available in the planning stages. But once completed… there may not be any choice but to report the transaction as it occurred.

    Now might be a good time to change the source of some of your income to help reduce the risk of paying this additional tax. One might consider investing in tax-exempt bonds. The reasoning behind investing in tax-exempt bonds is the interest income would not be included in the AGI or net investment income. Some might consider investing in tax-deferred annuities. Others might consider investing in rental real estate. Even though rental real estate is considered a passive activity, rental real estate usually generates a net loss after depreciation, so there would be no net investment income to tax. If you believe that you might be affected by the new Medicare Surtax, make an appointment with us to discuss how you might be able to reduce or avoid paying all-together the additional 3.8% tax.

  • Dec 14

    Your paycheck is going DOWN! One might be wondering, DEMANDING some explanation for the reason of less money in his or her pocket. As an employee you should know that since 2010, your share of Medicare tax has been reduced from 6.2 to 4.2%. Medicare is what forms the basis of the Federal Social Security Program, which provides monthly income to recipients (based on the recipient’s contributions made during his or her employment period). This tax reduction (tax holiday) is scheduled to expire after December 31, 2012.  Therefore starting January 1, 2013, as an employee, your share of Medicare tax will return to 6.2 percent. Although this won’t increase your income taxes, it will definitely result in less money in YOUR pocket!