Planning Moves to Lessen the Sting of the 3.8% Surtax

Since 2013, many higher-income US taxpayers have had to pay a 3.8% surtax on net investment income. Part of the landmark Affordable Care Act signed into law in 2010, this provision was designed to raise revenue to offset other costs including tax credits for consumers purchasing health insurance on the exchanges.

We believe it’s important to understand how this tax applies in order for taxpayers to better manage their tax bill.

Who is subject to the surtax?

Single taxpayers whose modified adjusted gross income (MAGI) exceeds $200,000 are potentially subject to the surtax. For married couples filing a joint return the threshold is $250,000. (For married couples filing separately, the MAGI threshold is $125,000). Interestingly, unlike most provisions in the tax code, these thresholds are NOT adjusted for inflation each year which means that more taxpayers are subject to the tax each year. In fact, since its inception the number of individuals subject to the tax has doubled.

Taxpayers subject to the 2.8 percent surtax

What type of income is subject to the surtax?

The surtax is applied broadly to most non-wage income including interest, dividends, capital gains, royalties and certain rents. Importantly, it does not apply to pension or retirement income, including distributions from retirement accounts and IRAs, or Roth conversions. Other types of income that are not subject to the surtax include: