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What is the 3.8% Surtax?

When the Affordable Care Act was passed it included a tax to offset the cost of providing subsidies for health insurance and the expansion of Medicaid.  This tax is a 3.8% surtax on “net investment income” above certain thresholds. The threshold is based on your tax filing status. The following are the threshold amounts:

  • Single- $200,000
  • Head of Household- $200,000
  • Married Filing Joint- $250,000
  • Married Filing Separate- $125,000
  • Trust and estates- threshold is top bracket, which is $12,150 in 2014

The 3.8% surtax will apply to the lesser of the investment income, or the amount by which your Adjusted Gross Income (AGI) exceeds the threshold amount listed above.

So what is considered investment income? Investment income is made up of:

  • Rents
  • Royalties
  • Dividends
  • Interest
  • Annuity Distributions
  • Passive Activity Income
  • Net Capital Gain Income on disposition

The following are not considered investment income:

  • W-2 Income such as salary and wages
  • Social Security Income
  • Distributions from IRA’s and Qualified Plans
  • Self-Employment Income
  • Gain and Active Interest in Partnerships/S-Corps
  • Any Income that is not otherwise taxed under the Internal Revenue Code such as Tax Exempt Bonds

In order to illustrate how this 3.8% surtax applies, here’s a quick example:

Let’s say that Joe and Susie file a married joint tax return. They have the following income:

  • $300,000 from their Salaries
  • $100,000 from Dividends
  • $20,000 from Interest in their Bank Accounts
  • $45,000 from Oil and Gas Royalties

Because Joe and Susie are married and filing a joint return their threshold amount for the 3.8% surtax to apply is $250,000.  Their AGI is $300,000. Their investment income is $165,000.  The amount that their AGI exceeds the threshold amount of $250,000 is $50,000.  The 3.8% surtax applies to the lesser of the AGI that exceeds the threshold amount or the investment income.  In our case the amount by which the AGI exceeds the threshold amount is $50,000; and the amount of the investment income is $165,000; which creates a tax bill of $1,900. ($50,000 x 3.8% surtax = $1,900).

Scottsdale and Glendale Estate Planning Lawyer David Eastman - VA Accredited AttorneyContributed by MH Arrowhead, Scottsdale and Phoenix Estate Planning Attorney and Partner, David T. Eastman.

Why Choose Morris Hall:
You have a number of options when it comes to estate planning, so why pick Morris Hall?  First off, estate planning and asset protection are a very complicated endeavor and you should only trust someone who focuses exclusively on those matters.  Also, MH is a proud member of The American Academy of Estate Planning Attorneys (AAEPA) which provides us additional support, advanced training, tools and information that is not available to others – which means that we can better protect your assets and your loved ones.  We are one of only two firms in Arizona that belong to the AAEPA and are the only firm in New Mexico that has been granted membership.  If you have assets and loved ones that you want to protect, you are in good hands with MH.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

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