Medicare Contribution Tax on Net Investment Income

Tax Professionals' Resource
February 12, 2013 — 1,739 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

Reconciliation Act 2010 levies a tax on Medicare contribution, of about 3.8% on estates, trusts, and individuals, for income that is not earned. This is effective from December 31st, 2012. In addition, the Medicare contribution tax is an addition to the 0.9% hospital insurance tax, additional tax for payers with high wages or income, tax imposed on interests, royalties, rents, and Medicare.

Understanding net Investment Income

The net investment income in simple terms is calculated as given here. Firstly, the sum of the gross income that is generated from annuities, interest, dividends, and rents is calculated. If these are included in the ordinary course of business to which the Medicare contribution does not imply, it can be excluded. Then the sum of derived gross income from a business, to which the contribution tax on Medicare applies, is calculated. Following this is the calculation of the sum of net gain that is attributed to the disposition of property to which contribution tax on Medicare does not apply. If the sum of the above three exceeds the permissible deduction that is correctly allocable to the net overall gain, it can be termed as net investment income.

Exceptions Involved

New Investment Income does not take into consideration the gross income generated from the tax-exempted bonds, benefits, trusts, etc. The net investment income also excludes amounts that are subjected to the SECA (Self-Employed Contribution Act) tax. It does not take into consideration the self-employment income for the tax period, if the said item is subjected to Hospital Insurance portion of the SECA tax. The Qualified retirement plan distributions are also excluded from the net income from investment.

Individuals Subjected to Tax

The individuals who will be subjected to the Medicare tax are:

  • The citizens of US and the residents from outside the US. It would not apply to the people who are not residing in US. 
  • For the individuals, the tax would be 3.8% less than the income received from investment or an excess of the MAGI (Modified Adjusted Gross Income) over the applicable limit of amounts such as $250,000 for the living spouses and joint return filers.
  • For the taxpayers who are married and filing a return.
  • The individuals with only MAGI, above the threshold amount that is applicable and subjected to the tax.

Individual Estimated tax Provisions

Medicare contribution tax is also subjected to the estimated tax provision, which means that the taxpayers who are expecting to be subjected to the Medicare tax might have to take it into consideration at the time of figuring out their estimated tax payment. Also, an estimate amount of penalty would be applied extra to the Medicare contribution tax.

Impact on Estates and Trusts

This tax would not apply to trusts of thriving interests, devoted for charitable causes. It would also not apply to a tax-exempt trust or grantor trusts. Also for estates, the tax would be 3.8% less of the undistributed net investment income.

Tax Professionals' Resource