As you calculate your estimated federal tax for 2013, be sure to take into account two new surtaxes: the net investment income tax and the additional Medicare tax. Here’s how to tell if they’ll affect you and what you can do to blunt some of the impact.

Net Investment Income Tax

This 3.8% tax applies when you have investment income such as dividends, interest, and capital gains, and your modified adjusted gross income (MAGI) exceeds $250,000 (for married filing jointly). When you’re single, the MAGI threshold is $200,000.

Type of Income

Some types of income are not considered when computing your investment income for purposes of this tax.

  • One example is tax-exempt interest. Depending on your overall investment goals,
    purchasing municipal bonds may be an option to consider.
  • Retirement plan distributions, including withdrawals from your IRA, are not counted as investment income when figuring the tax, either. However, taking money from your accounts does increase your MAGI.
  • Income from passive activities such as rental real estate is generally subject to the new tax. Depreciation deductions and a one-time opportunity to revise the way you group income from your rentals can offer some relief.

Medicare Tax

This 0.9% surtax applies to wages, tips, and self-employment income when your earned income exceeds $250,000 if you’re married filing a joint return ($200,000 when you’re single).

Employer Requirements

Your employer is required to begin withholding the additional tax once you’ve earned $200,000, regardless of your filing status.
Other earnings, including wages earned by a spouse or from a second job, are not considered. Depending on your total income, you may need to revise your W-4 or make quarterly estimated tax payments.

Call your advisor for an analysis of your exposure to these new taxes. They can help with personalized planning advice.