Medicare Tax on Investment Income
On March 25, 2010, Congress passed the Healthcare and Education Reconciliation Act of 2010 (H.R. 4872).
The Reconciliation Act amends various provisions of the Patient Protection and Affordable Care Act (P.L. 111-148) which was enacted March 23, 2010. The Reconciliation Act adds provisions that were not included in the Patient Protection Act including a Medicare Tax Investment Income.
The Reconciliation Act added a new IRC Section 1411 that imposes a new 3.8% Medicare tax on investment income. The new tax on individuals is equal to 3.8% of the lesser of:
1. The individual’s net investment income for the year, or
2. The amount the individual’s modified adjusted gross income exceeds the threshold amount ($200,000 individual).
For estates and trusts, the tax equals 3.8% of the lesser of:
1. Undistributed net investment income, or
2. Adjusted gross income (over $11,200, the dollar amount of the highest trust and estate tax bracket).
For married couples, the threshold amount is $250,000 for a joint return and $125,000 for married, filing separately. For all other individuals the threshold amount is $200,000 (i.e., if the individual’s modified adjusted gross income exceeds $200,000, a 3.8% tax is imposed on the lesser of the individual’s net investment income (for the tax year) or the adjusted gross income amount, i.e., $200,000).
Net investment income (defined): income from interest, dividends, annuities, royalties and rents (other than such income derived in the ordinary course of a trade or business).
The definition of net income includes:
1. Income from passive activities
2. From a trade or business of trading in financial instruments or commodities.
This tax provision takes effect for tax years beginning after December 31, 2012 (i.e., commences January 1, 2013, first tax year, 2013).
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