Plus a 0.9% Medicare surtax on earned income is assessed over the same adjusted gross income thresholds.
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Any further increases in MAGI beyond that point will not change the amount of 3.8% Medicare Surtax liability.
The lessor of the two is multiplied by 3.8% to determine the 3.8% Medicare Surtax for that taxable year.
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In December 2012, Treasury released its proposed regulations, including detailed tax rules for the 3.8% Medicare surtax on unearned income.
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However, NII is not the only important term that is critical when determining the effects of the 3.8% Medicare Surtax amounts.
Oh the other hand, an increase in MAGI does not necessarily always increase the amount subject to the 3.8% Medicare Surtax.
Net Investment Income plays an integral role in determining the effects of the 3.8% Medicare Surtax for a taxpayer and his investments.
The first is that increases in NII will always increase the amount subject to the 3.8% Medicare Surtax by the same quantity.
The 3.8% Medicare Surtax is applied on the lessor of the two.
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There is an additional 2.3% Medicare surtax that is part of Obamacare.
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NII, which consists of three parts reducible by certain deduction, plays a critical role in determining the effects of the 3.8% Medicare Surtax.
But this credit cannot exceed the taxes paid in the U.S. on the same income and does not include the 0.9% Medicare surtax.
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This means that for individuals who have little or no net investment income, their 3.8% Medicare Surtax will be minimal if not zero.
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Therefore since for general income tax purposes, income earned from renting real estate should not be included in the calculation of the 3.8% Medicare Surtax.
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Before focusing on the specific application of the 3.8% Medicare Surtax to an individual investment situation, it is important to establish a general understanding of this tax.
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Stay tuned as we explore the treatment of the 3.8% Medicare Surtax for other unique situations that may affect your 3.8% Medicare Surtax calculation for this year.
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Because of this, the IRS strives to provide a comprehensive definition of NII to guide taxpayers as they calculate their 3.8% Medicare Surtax amounts this taxable year.
Although earning rental real estate income is not considered a passive activity for real estate professionals, the 3.8% Medicare Surtax might still apply to the rental real estate income.
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Having said this, the 3.8% Medicare Surtax applies to rental real estate activities in a slightly different manner than the general income tax rules (i.e. those under Code Chapter One) do.
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Under current law, the highest tax rate in the US in 2013 will be 40.5% (39.6% assuming the Bush tax cuts are not extended plus 0.9% Medicare surtax on high earners).
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Generally, the 3.8% Medicare Surtax applies to investment income.
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Since the IRS intended the 3.8% Medicare Surtax to place a tax on investment income, it is natural that income from standard forms of investment assets are included in the NII sum.
Although not included as an income tax rate increase, next year individuals will be reporting and including the new Net Investment Income (NII) tax (also known as the Medicare surtax) with their Form 1040.
The IRS hopes that final regulations will be released at the end of this year, but in the meantime taxpayers can rely on the proposed regulations when determining their own 3.8% Medicare Surtax for 2013.
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This 3.8% Medicare Surtax affects all taxpayers with investment income, but the 3.8% Medicare Surtax has especially important implications for taxpayers whose occupation is involved in normal sources of investment income, such as rental income.
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In order to be excluded from the 3.8% Medicare Surtax altogether, taxpayers who are real estate professionals must also show that the rental real estate income was derived during the ordinary course of a trade or business.
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This means income earned from various forms of investments such as rental income are usually included in the determination of the 3.8% Medicare Surtax, so long as it is not earned during the ordinary course of trade or business.
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Such taxpayers are generally exempted from the 3.8% Medicare Surtax unless their business either (a) is a passive activity with respect to such taxpayer or (b) is a trade or business involved in trading in financial instruments or commodities.
The 3.8% Medicare Surtax is outlined in IRC Sec. 1411 under Chapter 2A. In addition to Code Sec. 1411, this past December the IRS also released proposed regulations to aid and guide taxpayers effected by this new tax.
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However, income derived from two types of trades or businesses, specifically those that are trades or businesses trading in financial instruments or commodities and those that are considered passive activities with respect to taxpayers, is subject to the 3.8% Medicare Surtax.
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