Medicare tax on investment income 

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Popular REIT Investment Vehicle To Avoid The 3In 2013, many real estateinvestors will find themselves paying not only a 39.6 percent income tax rate,but also a 3.8 percent Medicare tax on investment income. But significant reliefcan be found in Charitable Remainder Trusts for charitably inclined highincomeinvestors.

Beginning in 2013, the 3.8 percent Medicare tax imposed by the Health Careand Education Reconciliation Act of 2010 will apply to single taxpayers whoseModified Adjusted Gross Income exceeds $200,000 a year, or $250,000 a year for amarried couple filing jointly.

The tax is imposed only on "net investment income," and only to the extentthat total "Modified Adjusted Gross Income" exceeds the $200,000 or $250,000thresholds mentioned above. How Does It Work?For example, John and Janeare married and file a joint income tax return. They have MAGI of $500,000, ofwhich $150,000 is net investment income. The 3.8 percent Medicare tax iscalculated on the lesser of net investment income of $150,000 or the excess oftheir MAGI over the threshold amount ($500,000 $250,000 = $250,000). The netinvestment income of $150,000 is less than $250,000 and therefore the additionaltax is assessed on $150,000. (150,000 x 3.8 percent = $5,700). John and Janewill owe an additional Medicare tax of $5,700 in addition to an income tax rateof 39.6 percent.

John and Jane and other charitably inclined investors should reconsiderestablishing charitable remainder trusts in 2013 to minimize the 3.8 percentMedicare tax and to receive an income tax deduction to save tax dollars underthe higher rates.

A charitable remainder trust can be financially structured to pay thedonating Grantor more than 90 percent of the initial starting value using thetime value of money rules. The charitable beneficiary can be a familyrun andcontrolled charity that will receive any remaining trust assets after theGrantor has received his or her stream of payments, and it can then compensatefamily members for legitimate charitable work that they perform.

  Wednesday, October 28, 2015 at 3:16:20 AM

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