Tax Planning for the New Medicare Taxes Before Year-end

December 17, 2013 

As part of the Affordable Care Act of 2010, new Medicare taxes went into effect in 2013. Intended to impact "higher-income individuals," many taxpayers may be surprised come April when they end up owing taxes versus getting a refund. This could happen to anyone with big one-time taxable income or investment gains in 2013.

So what are these taxes and how can you plan for them?

The 3.8 percent Net Investment Income Tax is assessed on items such as dividends, taxable interest, rent, royalties, capital gains, and taxable income derived from passive activities in a trade or business. It applies to individuals making more than $200,000 (more than $250,000 for married couples filing jointly) in "Modified Adjusted Gross Income" (MAGI) (See IRS Form 8582) in 2013.

The .9 percent Medicare Payroll Tax is assessed over the traditional 1.45 percent Medicare tax if wages are more than $200,000 from one employer. Employers don't have to consider a spouse's wages or if you have a second job. So taxes could be over-withheld or under-withheld, and high-wage employees

should be prepared for this surprise come April.

Here are some tax-planning strategies to consider:

Before year-end:

1. Consider selling your investments that have losses to reduce your net investment income.

2. If you're employed, increase your retirement contributions for the year to reduce MAGI.

3. Shift IRA investment fees to taxable accounts to make them deductible against net investment income.

4. Consider gifting highly appreciated assets to charity in 2013 to reduce your MAGI. (Much better than selling first and then donating.)

5. If you're self-employed, consider deferring your business income into 2014 and accelerate business deductions (and equipment purchases) into 2013.

6. If you're over age 70 ½ consider making a qualified charitable distribution (QCD) from your traditional IRA to help reduce your MAGI.

Longer-term strategies (after this year):

1. Consider investments in municipal bonds, life insurance, and nonqualified annuities to produce income or defer taxes. Properly structured (e.g. consult your financial planner), these investments can be used to create tax-advantaged cash flow in retirement.

2. Consider making sales of investment property, such as vacation homes, on an installment sale basis, to spread out the gain recognition over a number of years.

3. Convert some/all of qualified retirement assets to a Roth IRA over time. Conversion income counts as MAGI (e.g. you will pay tax on the amount you convert), but Roth IRA withdrawals in retirement won't be taxable. And any growth in the account between now and then is tax-free.

4. Consider gifting to a 529 college savings plan for your children/grandchildren, or pay their college tuition directly. Such gifts aren't usually tax-deductible, but they will place assets outside of your portfolio, and avoid taxable investment income in future years.

As with any tax planning strategy, consult your tax advisor for further guidance on how these strategies -- and others -- might apply to you. But don't wait, December 31st is only a few days away.

Karin Grablin, is with SRQ Wealth Management, and can be reached at 941-556-9004 or

This information is not intended to be a substitute for specific, individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax adviser.

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