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Planning for the 3.8% Medicare Surtax

Posted by McDonald & Osborne Posted on Oct 12 2015

There is much uncertainty over what will happen to US income tax rates in 2013. But what we do know is top rates on capital gains and dividends will rise by 3.8% for those with a modified adjusted gross income (AGI) over $200,000 or $250,000 for married taxpayers filing a joint return. The new surtax will be imposed on the lower of the filer’s net investment income or the excess of modified AGI over the thresholds (modified AGI is your regular AGI plus foreign earned income).

In response to the surtax, you may consider selling appreciated assets this year instead of 2013 to dodge the higher rate. Remember that on the sale of a principal residence, only the gain that exceeds $500,000 for married taxpayers ($250,000 for singles) will be hit by the surtax if your AGI is high enough to trigger it. It won’t matter what year you sell your home if you qualify for a full exclusion of any profits. However, there is no exclusion of gains on the sale of second homes and rental properties. Selling these properties in 2012 will avoid the surtax. The same holds true for stocks that have appreciated in value.

Also keep Roth conversions in mind. Converting your IRA to a Roth is a taxable event. However, doing so in 2012 could be advantageous if you expect income tax rates to rise going forward. While IRA payouts themselves aren’t subject to the Medicare surtax, they do increase your AGI which could cause surtax issues.

Remember that each taxpayer’s income tax situation is unique. We cannot make blanket recommendations that fit every client’s needs. For a tax plan tailored fit to your personal situation, please contact our office.

Stephen Osborne

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