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Planning for the Medicare surtax

By Judy Martel · Bankrate.com
Wednesday, November 20, 2013
Posted: 2 pm ET

There's a new tax on the block, whose presence will intrude on high-earners and those seeking income from a retirement investment portfolio. Congress implemented a 3.8 percent surtax in January to help cover the rising costs of Medicare, but there are ways to lessen its bite.

Uncle Sam wants your income.The surtax will be imposed on either the amount of modified adjusted gross income, or MAGI, or the net amount of taxable investment income over a certain threshold -- whichever amount is less. The thresholds for the surtax are: $250,000 for married couples filing jointly, $125,000 for married couples filing separately and $200,000 for single filers.

Jeff Speight, client relationship manager with Tanglewood Wealth Management in Houston, says now is the time to begin planning for both short-term and long-term methods of reducing MAGI or net investment income in order to stay under the thresholds.

Tips for reducing income subject to the surtax

  • Investment income can include stock dividends, capital gains from the sale of equities or a home, bank interest, royalties and income from rentals or annuities. If you view your entire portfolio as a whole and manage taxable and nontaxable accounts well, you can reduce taxable income, says Speight. For example, tax-exempt bonds and growth equities could go into taxable accounts, while dividend-producing equities would go into the tax-deferred account.
  • Take carryover losses. Last year, Speight says, while Congress debated tax reform, "we put investment losses in a war chest to use at some point in the future." The additional surtax means that now is the time to claim those losses, he adds. Because of the new graduated capital gains rates, and depending on income, the depreciation on income could be 18.3 percent or 23.8 percent, versus 15 percent last year. "Offsetting gains is a much better value this year than last year."
  • Instead of giving cash, gift your appreciating securities to charity. That way you avoid the capital gains imposed from selling the securities, and you still get a charitable income tax deduction.
  • As a longer-term strategy, Roth IRA withdrawals are tax-free, so consider moving some of your traditional IRA into a Roth IRA, says Speight. "But doing that means you'll pay higher income taxes in the year you make the conversion," he adds, so consider the timing carefully.
  • For those who are eligible for a retirement plan, allocate as much income into it as you are allowed, Speight advises. "Every dollar you put in will reduce your MAGI."

Keep up with your wealth and mortgages and follow me on Twitter: @JudyMartel.

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