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The 3.8% Medicare Surtax

Be aware of this new tax, it applies to net investment income of single filers with modified adjusted gross incomes (AGI) above $200,000 and couples with income over $250,000. Marrieds filing separately have a $125,000 threshold.

Modified AGI is AGI (bottom figure on page one of your form 1040) plus tax free foreign earned income. The tax is due on the smaller of net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. But tax-exempt interest and distributions from 401 (k)s, IRAs, Roths and pension plans are not counted.

Take steps to minimize the impact of the surtax if you'll be subject to it or try to keep your income below the thresholds. For example, use an installment sale to spread out large gains, or, if feasible, do a like-kind exchange to defer the gain.


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