Affordable Care Act – Effect on Individuals With Investment Income

Unearned income Medicare contributions tax—The Health Care and Reconciliation Act of 2010 imposes an annual 3.8 percent “unearned income Medicare contribution” tax annually beginning in 2013 on the lesser of: (1) net investment income from interest, dividends, annuities, royalties, rents and certain other income and gains not generated in the ordinary course of an active trade or business, or which is generated in a trade or business of trading financial instruments or commodities or (2) modified adjusted gross income (which includes, for this purpose, foreign earned income net of certain expenses) in excess of $200,000 ($250,000 for joint filers and surviving spouses, $125,000 in the case of married taxpayers filing separately).

The definition of net investment income excludes distributions from most qualified plans and amounts subject to self-employment tax. In the case of the disposition of a partnership interest, or stock in an S corporation, net investment income includes gain or loss only if it would be taken into account by the partner or shareholder had the entity sold all its properties for fair market value immediately before the disposition. Thus, only net gain or loss attributable to property held by the entity, and not attributable to an active trade or business, is included.

Similar rules apply to estates and trusts with respect to their undistributed net investment income. They become subject to a 3.8 percent unearned income Medicare contribution on the lesser of: (1) their undistributed net investment income or (2) the excess of their adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.


MarkJBurger