Before the American Health Care Act was rejected, Republicans in the Senate were planning to keep a 3.8% surtax targeting investment income as part of their proposed healthcare bill; this fee could impact you if you earn money from investments.
While the bill was killed in the Senate, President Donald Trump has made it clear that inaction is “not an option” when it comes to health care. This means that the surtax’s survivability is still on the line.
Learning where this tax is coming from and what specific items it targets can help you keep as much of your investment income as possible. Republicans overall are divided on this tax those in the House voted to get rid of it entirely, while those in the Senate voted to keep it.
Where is the 3.8% Tax Coming From?
The surtax was part of the 2010 Affordable Care Act that took effect in 2013. As part of Obamacare, the tax was expected to help fund the ailing program and is expected to bring in about $30 billion from taxpayers this year along.
While Congress Republicans voted to repeal the tax, Senators plan on keeping it. One of the hallmarks of Obamacare was shifting costs to high earners and those who planned ahead with investments and retirement funds; this 3.8% surtax takes direct aim at these diligent earners and savers.
Who Pays the 3.8% Surtax?
The tax was designed to target those with high income, or those with high investment income; about 75% of the revenue generated comes from households with more than $1 million in annual income from all sources. This year, each of those high earning households will pay about $37,000 each for this surtax.
It’s not just the highest earners who are targeted; households earning over $200,000 and up to $500,000 are subject to taxation as well. For those who simply have an investment windfall, the tax could be an unwelcome surprise, particularly if they did not qualify for it in the past.
Careful planning could help those collecting retirement income for the first time avoid this extra tax entirely. The tax burden for these households will vary based on their income each year and any windfalls they receive from investments.
How the 3.8% Surtax is Calculated
This flat rate tax applies to any net investment income over the set amount. For couples, the minimum AGI to be taxed this additional amount is $250,000; for individuals, the minimum AGI is $200,000. Only the income above the minimum amount above is taxed at this additional rate.
Following these steps will help you avoid paying out more than you have to:
• “Investment Income” covers a wide variety of potential sources, from interest and dividends to almost all royalty income and capital gains.
• Excluded from the 3.8% surtax are municipal bonds income, partnership and S corporation income and even some types of rental income.
• Account for all losses; that 3.8% surtax is on your net, not your gross; if you have losses on one investment, they can offset your profits from another.
• Minimize your Adjusted Gross Income (AGI) and you can trim the surtax considerably. Your AGI is the number at the bottom of your 1040 and you can reduce it by making charitable contributions (depending on your age), making deductible contributions to y our 401(k) or pension or even taking a capital loss of up to $3,000.
• If you’ve moved, then your moving expenses may also help reduce your AGI, if they qualify this can help reduce your surtax burden.
• Taxable pension, IRA or Social Security payments are not subject to the surtax, but they could increase your income enough that your investments get taxed by it. If you have a tax-free IRA, your payouts are not subject to the surtax.
Simply being aware of this “leftover” tax from the original Obamacare bill allows you to take steps to minimize its impact. Your accountant or investment advisor can help you determine if any of your income is subject to the surtax. If it is, they can also help you figure out ways to trim your tax burden and keep more of your investment income.
Regards,
Ethan Warrick
Editor
Wealth Authority
