Tax Planning

Tax Planning Suggestions To Decrease Your Medicare Surcharge Of three.8%

Having the income to be hit by Medicare surcharge tax is a good thing as you have to pay a surcharge … [+] 3.8% taxes on your investment income are no cause for celebration. We provide tips on tax planning to minimize the sting of the Obamacare surcharge.


It seems like I speak to more people each year who are getting an additional tax bill, thanks in part to the 3.8% Medicare surcharge fee. They often call me in hindsight looking for ways to minimize the sting of that extra tax that they were often not even aware of. Proactive tax planning can help minimize or eliminate the Medicare surcharge for many taxpayers.

Don’t be surprised if your stockbroker, financial advisor, and CPA doesn’t offer tax planning solutions that will help you avoid being overwhelmed by this often costly tax. Most financial advisors do not offer tax planning, and some of them are not even allowed to provide tax planning guidance by their companies. That’s a shame because tax planning is one of the most valuable services financial planners can offer their high-income clients. Many of my clients live in high tax countries like California and New York, which makes tax planning even more valuable.

California already has some of the highest state income taxes in the country at 13.3%. This is in addition to the top 37% of the federal tax bracket. If you are a taxpayer in the highest federal and California tax brackets, you are also likely subject to an additional Medicare surcharge of 3.8% on your investment income.

The only positive side of the Medicare surcharge is that it makes more money than 90% of Americans do. Of course, I don’t think that will make the high tax any less painful.

You can also hear the Medicare surcharge called the Obamacare surcharge.

This is how the Medicare tax works

Married couples earning more than $ 250,000 of Adjusted Gross Income (AGI) receive a flat Medicare surcharge of 3.8% of Net Asset Income. For single filers, the threshold is only $ 200,000 from AGI. This is another example of the marriage penalty at work in our tax code. In case anyone cares, I’m married, and my husband and I have been feeling the pain of both marital punishments and high tax rates since we moved to Los Angeles.

The Medicare surcharge is only applied to investment income that exceeds certain thresholds. For example, if you make $ 100,000, you don’t owe any additional taxes over the Medicare surcharge.

However, let’s say you are an unmarried taxpayer who makes $ 180,000 annually in AGI and has made a one-time capital gain of $ 100,000 (the investment income) from the sale of long-held stocks. This would increase your total income to $ 280,000, with $ 80,000 of your total income subject to the 3.8% surcharge. This would result in you owing about $ 3,040 in additional taxes from the Medicare surcharge alone.

Your investment income is likely to fluctuate from year to year, especially if you’re selling a home or receiving stock compensation and realizing investment income as your stock options. Many people only think of their taxes based on their paychecks or business income. This is probably why many people are surprised when they first see the Medicare supplement. It is not uncommon for a Los Angeles homeowner to have a capital gain of a million dollars. The same goes for people who work in technology and have high stock payments.

What types of income are eligible for the Medicare surcharge?

Sources of income such as interest, dividends, capital gains, rental income, royalties, and even some other passive investment income are counted.

What types of income are not covered by the Medicare surcharge?

In principle, you can exclude income from municipal bonds, partnerships and S companies if you actively participate. There are also certain types of rental income and some capital gains from the sale of a business that can also be excluded.

How to Minimize Your Medicare Surcharge

Hope you have such a high income coupled with strong investment growth that you cannot eliminate the Medicare surcharge. But with some smart tax planning guidance, you should be able to minimize the amount of Medicare surcharge you have to pay each year.

  1. Before selling a treasured home, consider your income and the Medicare surcharge. Most Americans don’t owe capital gains taxes when they sell their primary residence because you can lock out a profit of up to $ 500,000 ($ 250,000 for singles) on the sale. While $ 500,000 is a nice exception, it doesn’t go as far in California as it does in almost any other state.
  2. Benefit from the tax loss. I have been supporting clients with this valuable tax-saving strategy since 2004 and I am still amazed how few so-called financial advisors take the time to do it. The Medicare surcharge of 3.8% is only applied to net investment income. If you make large profits on one position, you can make losses on other positions to minimize your net realized capital gains. If I roll your eyes, don’t worry. A good fiduciary financial planner can help you with this.
  3. Look for ways to reduce your AGI. The lower your AGI (the number at the end of TAX FORM 1040), the lower your income will be subject to the 3.8% surcharge.
  4. Do you need another reason to contribute to your retirement savings? When you contribute to your 401k, 403b, or Cash Balance Pension, your AGI will be lowered. You can also make charitable contributions from your IRA assets when you are 70 ½ or older.

You can escape the health supplement with death

Your heir or your heirs will receive a cost increase if they exist. So if you hold on to your investments until you die, there will be no capital gains taxes or the Medicare surcharge on any income you made before you died. Of course you will eventually pass, so this isn’t always a good option.

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