Plan Ahead To Cushion Medicare Surtax
(Dow Jones) The Medicare surtax at the heart of the new health-care law is certain to hit wealthy taxpayers hard unless they make a good plan to manage it, and some are already starting to do so.
Strategies for the tax involve creating effective tax deductions under new investment income rules, choosing the right investments, insurance products and business structures, and picking the right time to set up trusts. The idea is two-pronged but basic: Reduce overall taxable income, and reduce investment income.
There has never before been a separate tax support Medicare beyond a levy on wages, and it looks to be the biggest revenue raiser in the health-care law over the next 10 years.
The surtax adds a 0.9% Medicare Hospital Insurance Tax on earned income over $200,000 for single taxpayers and $250,000 for married couples, and an Unearned Income Medicare Contribution of 3.8% on investment income for taxpayers with adjusted gross incomes over $200,000 for single filers and $250,000 for married filers.
The 3.8% is assessed on the lesser of net investment income or the amount of modified adjusted gross income over the threshold. Net investment income is investment income minus certain expenses and includes interest, dividends, capital gains, annuities, rents, royalties and passive activity income. It does not include active trade or business income, distributions from IRAs or other qualified retirement plans, or income considered for self-employment taxes.
Keeping income below the threshold will be a key line of attack. Ways to do that include stashing money in qualified retirement plans and tax-exempt or tax-deferred investments including munici-pal bonds. Non-qualified deferred compensation, life insurance policies and oil and gas investments are other ideas, according to advisors.
People should convert IRAs to Roth IRAs to keep investment income down, according to Barry C. Picker, a certified public accountant at Picker & Auerbach CPAs, P.C. in Brooklyn, N.Y. The money the taxpayer pays to do the conversion won't be producing investment income in the future, and the Roth will produce a tax-free income stream, Picker says.
