High-income investors, be forewarned: Starting next year, you'll be paying anew 3.8% tax on certain kinds of unearned income. The revenue from this so-called Medicare surtax will finance part of the health care overhaul signed into law in 2010.
Only taxpayers with modified adjusted gross incomes of $200,000 for singles and $250,000 for joint filers in 2013 will be subject to the surtax. The new levy will apply to investment income (minus deductions), such as interest,capital gains, dividends, rental income and earnings distributed from annuities. The surtax is imposed on the smaller of net investment income or the amount that AGI exceeds the thresholds. (Workers also will pay an extra 0.9% on the Medicare portion of the payroll tax on income that exceeds the thresholds.)
To lower the potential tax bite next year, consider accelerating into 2012 income that might increase investment income or AGI. And defer anything that reduces investment income or AGI, into 2013.
Distributions from an IRA and other retirement plans are exempt from the surtax. But the income can push you over the surtax AGI thresholds. If distributions will expose you to the surtax, consider converting money from a traditional IRA to a Roth this year. Tax-free Roth distributions will not be included in your modified AGI in future years.
Big gains on a house sale can boost a surtax bill. If you've been thinking of selling, now might be the time. If the homeowner has lived in a principal residence for two of the past five years, only a capital gain above the home-sale profit exclusion would be included as income. That exclusion is$250,000 for singles and $500,000 for married couples filing jointly. But the entire profit on the sale of a second home or vacation home could be subject to the surtax.