YouTube Video Features Medicare Surtax

By Ken Berry

"Benjamin Franklin said, 'In this world, nothing could be said to be certain, except death and taxes.' At least with taxes, they keep changing." Thus starts a new eight-minute YouTube video entitled Medicare Investment Income Tax, produced by the nationally known Bruce Braden School of Taxation at Golden Gate University in San Francisco. 
 
The easy-to-follow video provides valuable insights into the new 3.8 percent Medicare surtax on investment income that will begin bedeviling taxpayers in 2013. It features commentary by Michael Vinson, an associate professor at Golden Gate. 
 
Vinson told AccountingWEB that the objective of the video is twofold. "First, it provides information to the tax practitioner community. Second, it is a marketing device that can be beneficial to both employers and students." 
 
The 3.8 percent Medicare surtax on net investment income is getting plenty of media attention as we inch closer to the start date. It applies to the lesser of a taxpayer's net investment income or the excess above modified adjusted gross income (MAGI) of $200,000 for single filers and $250,000 for joint filers. In addition, a separate 0.9 percent surtax applies to unearned income above $200,000 for single filers and $250,000 for joint filers. Both Medicare surtaxes were included in the health care law recently upheld by the US Supreme Court. Other income tax rate increases are already scheduled for 2013. 
 

Talking Points

Some of the items that will count as "net investment income" in 2013 are:

  • Interest
  • Dividends
  • Taxable portion of annuity distributions
  • Rents
  • Royalties
  • Gains from investments in passive activities
  • Taxable portion from sale of principal residence
  • Gain from sale of vacation home
  • Net capital gain from the sale of property (other than property held in an active trade or business)
 
Caution: This is by no means the complete list.
 
Vinson says that most taxpayers won't have to pay the 3.8 percent surtax due to the high thresholds. "That represents only the top 2 percent of taxpayers," he says in the video. He gives an example of a hypothetical single taxpayer, Jane, who has $140,000 of wages and $50,000 of net investment income. Because Jane's income figures fall below both thresholds, she isn't liable for the surtax.
 
However, Vinson does note that the thresholds aren't indexed for inflation, so the 3.8 percent surtax could become more a problem in the future.
 
The IRS has yet to define exactly what constitutes "net investment income" for this purpose, but Vinson points out that it's thought to cover items such as interest, long-term and short-term capital gains, dividends, the taxable portion of annuity distributions, gains from sales of property in a passive activity, and the taxable portion of gain from the sale of a principal residence or second home. It does not include certain other items like most qualified retirement plan and IRA distributions, veterans' and Social Security benefits, and income from tax-exempt municipal bonds.    
 
Practitioners are advised to steer clients away from the surtaxes when possible. Among the year-end strategies mentioned in the video, clients may benefit by realizing current capital gains, investing in tax-free municipals, contributing to a Roth IRA that can provide future tax-free payouts, and boosting retirement plan holdings. The emphasis is on accelerating income into 2012. 
 
What happens next is uncertain. "It's up to Congress to take action. Otherwise, the tax increases and Medicare taxes will go into effect in 2013," says Vinson. He says that Golden Gate has no current plans to update the video, but it expects to provide additional clips if changes take place.  
 
Watch the YouTube video.
 
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