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With 2012 winding down and 2013 quickly approaching many are looking ahead to the changes 2013 is bringing to estate tax in order to figure out how these changes will affect all of us as taxpaying U.S. citizens. This will be the first in a series of blogs we have planned in which we will briefly discuss the various changes on the way. To start the series off we’ll take a look at one of the provisions coming into effect day one of the new year which has been gaining considerable attention: the new 3.8% investment income surtax, also referred to as the “health care surtax” or the “Medicare tax”. The source of these two nicknames stems from the fact that this new surtax is being introduced as part of the Affordable Care Act which was passed by congress back in 2010 but was only recently upheld by a supreme court decision this year. The surtax specifically serves as a revenue generating mechanism for supporting the new health care system. One can find the full text of the Affordable Care Act provided online by the U.S. Healthcare Department on the page here with the relevant provisions for this surtax beginning on page 946 under Section 1411 (Imposition of Tax) or click here to view the full pdf version.

The professionals at Keebler and Associates have had a large impact on the growth of awareness concerning this new surtax and have proved a great source for information, insight, and discussion on the topic. Here they have provided a pdf document which gives a detailed overview of the surtax as well as provides tables and example scenarios. Also the American Institute for CPAs’ website has provided this blog entry with both the transcript and full audio of a recorded podcast featuring Robert S. Keebler, a Partner of Keebler and Associates, discussing the new surtax at length.

These two sources of information on the health care surtax are understandably a bit dense and in the case of the latter geared towards CPAs as the target audience, but for those looking for a more concise bit of information on the subject, WealthCounsel adapted the information as provided by Keebler and Associates into a short and sweet form letter, which it provided to members with the intent of bringing their clients up to speed. The following is a quotation of the bulk of the letter (with the usual letter formalities omitted):

Now that the health care law has been declared constitutional, the remaining provisions will be going into effect. One little known provision is a new 3.8% investment income surtax, also called the health care surtax or the Medicare tax; it will go into effect on January 1, 2013.

This new surtax will be assessed on the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over the “threshold amount.” For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; all other individual taxpayers, $200,000. For trusts and estates, it is the beginning of the top income tax bracket ($11,650 in 2012).

Stated another way: 1) If your modified adjusted gross income (MAGI) is less than or equal to the threshold amount that applies to you, you will not pay this tax. 2) If your modified adjusted gross income (MAGI) is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount.

Note that the surtax liability is determined on income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital gain rate is scheduled to increase for high-income taxpayers to 20% in 2013, so the total tax on capital gains (with the surtax) could be 23.8% in 2013 and beyond.

That alone should provide a pretty good idea how the new health care surtax will work starting in 2013 and more importantly how it will affect you personally as a taxpayer. Knowing where one stands in relation to their threshold should give a reasonable estimate of how much extra one can expect to pay next year due to this surtax. This upcoming year it should certainly prove interesting observing all of the emerging and evolving professional strategies for minimizing the impact of this surtax.

Tags: 2013 healthcare surtax, 3.8% investment surtax, medicare tax


Office of the Legislative Council (2010), Compilation of Patient Protection and Affordable Care Act. U.S. House Office of the Legislative Counsel. Retrieved 9/26/12 from https://housedocs.house.gov/energycommerce/ppacacon.pdf

Robert S. Keebler, CPA, MST (2012), Understanding the Health Care Surtax. Keebler and Associates. Retrieved 9/26/12 from https://www.aicpa.org/publications/personalfinancialplanning/downloadabledocuments/health-care-surtax-chart-2012.pdf

American Institute for CPAs (2012), Estates and Trusts With 3.8% Medicare Surtax. AICPA. Retrieved 9/26/12 from https://blog.aicpa.org/2012/07/estates-and-trusts-with-38-medicare-surtax.html