One little-mentioned provision of the Patient Protection and Affordable Care Act is the 3.8% net investment income tax (NIIT) that went into effect during Barack Obama’s administration. Various commentators refer to it as the “Obamacare surtax,” the “health care surtax,” or the “Medicare tax”; but whatever one chooses to call it, it is still going to be with us unless and until the ACA is repealed or modified.
This surtax is assessed on Form 1040 (for individuals) and Form 1041 (for trusts and estates) upon the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over a threshold amount. For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; and all other individual taxpayers, $200,000. For trusts and estates, the threshold amount is the amount where the top income tax bracket for trusts and estates begins ($13,050 in 2021).
Does the Health Care Surtax affect me?
Stated another way: 1) If your modified adjusted gross income (MAGI) for 2021 is less than or equal to the threshold amount that applies to you, you will not pay the health care surtax. 2) If your MAGI is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount.
What’s all this about MAGI? Basically, it means that your healthcare surtax liability is determined on your income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital-gains income tax rate for high-income taxpayers stands at 20% in 2021, so the total federal tax on capital gains (with the surtax) could be 23.8% in 2021 and beyond. (Don’t forget to add state capital-gains taxes to get your true marginal tax rate on investment income.)
How Can I Avoid (Or Minimize) Investment Income Surtaxes?
The good news is that there are some steps Northern Virginia families can take right now to help you avoid or reduce the amount of your Obamacare surtax. Even though past Republican Presidents and Congressional majorities have stated a goal of eventually eliminating Obamacare and the NIIT entirely, there are many slips ‘twixt cup and lip. Unless and until repeal is passed and signed into law, there are no guarantees.
Now, more than ever, you need the assistance of experienced professionals to advise you and help you implement the best plan for you and your family. I stand ready to assist Virginia residents with the estate planning part of your project, and to work with your investment advisor and your CPA.
[Updated: December 2021]