New Medicare Surtax Form Makes Its Debut

The IRS certainly cut it close.

With just a few scant days until the official start of tax-filing season, the IRS approved a final draft of new Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts. This form will be used to compute the new 3.8 percent Medicare surtax on net investment income (NII) on 2013 federal income tax returns.

Under the Patient Protection and Affordable Care Act (the PPACA), known informally as “Obamacare,” the new 3.8 percent Medicare surtax went into effect on January 1, 2013. It applies to the lesser of NII or the amount by which a taxpayer’s modified adjusted gross income (MAGI) exceeds an annual threshold. The threshold is $200,000 for single filers, $250,000 for joint filers, and $125,000 for married couples filing separately.

Take the example of a single filer with NII of $50,000 and MAGI of $225,000 in 2013. In this case, the taxpayer owes a surtax of $950 (3.8 percent of the MAGI excess of $25,000), which is less than the tax that would be due on NII, or $1,900 (3.8 percent of $50,000).

The 3.8 percent surtax may also result in extra tax liability for trusts and estates. For these entities, the surtax applies the lesser of undistributed NII or adjusted gross income (AGI) above the dollar amount for the top income tax bracket for trusts and estates ($1,950 in 2013).

New Form 8960 includes a section for calculating NII. For this purpose, NII includes such items as:

  • Interest, dividends, rents, royalties, and annuities
  • Income derived from passive activities
  • Trading financial instruments and commodities
  • Net capital gains derived from the disposition of property (other than property held in an active trade or business)

Conversely, NII does not include various other income items, such as:

  • Active trade or business income
  • Gain on sale of an active interest in a partnership or S corporation
  • Distributions from qualified retirement plans or IRAs
  • Income from tax-exempt municipal bonds
  • Income taken into account for self-employment tax purposes
  • Capital gains excluded under the statutory limit for the sale of a principal residence

The IRS, which said it had to delay the start of tax-filing season to January 31 to accommodate Obamacare changes and other revisions, also recently released a draft version of instructions for Form 8960. Tax return preparers can use this for guidance as filings begin to stream in.

Related articles:

New Final Regulations Clarify Obamacare Tax Rules
IRS Asked to Clarify Rules for New Medicare Surtax

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