June 29, 2012

Tax on Net Investment Income to Take Effect

Contributors Diane Giordano, Partner, Tax & Business

Tax on Net Investment Income to Take Effect Tax & Business

On Thursday, June 28, 2012, the Supreme Court ruled in a 5 to 4 decision, that Congress does have the power to require individuals to acquire and maintain health care insurance. The Justices concluded that Congress has the power to impose mandates under the broad power of a tax.

As a result of this decision, the 3.8% Medicare Contribution Tax (MCT) will be in effect as of January 2013. The MCT will be applicable to unearned income and calculated as part of an individual’s ordinary or AMT income tax liability. This tax will generate revenue to help finance the myriad of reforms under the health care legislation.

The MCT will apply to estates and trusts, as well as individuals, and will be subject to the estimated tax payment rules. The MCT was the 2010 Health Care Act’s (The Affordable Care Act) most controversial provision.

Who will be taxed?

Generally, an individual taxpayer with net investment income and modified adjusted gross income (MAGI)* above the threshold amounts noted below will be subject to the new tax:

  1. $250,000 For taxpayers filing a joint return (also a surviving spouse)
  2. $125,000 For a married taxpayer filing separately
  3. $200,000 For a taxpayer filing single

*For most individual taxpayers, MAGI, is basically gross income.

Trusts with gross income above the dollar amount at which the highest estate and trust income tax bracket begins for the tax year will be taxed. Currently, this is $11,650 and will likely increase for 2013. (Certain types of trusts are exempted from the tax.)

Net investment income is investment income reduced by the deductions applicable to such income. Investment income is comprised of non-business income from interest, dividends, annuities, royalties, rent and capital gains.

The decision also requires individuals to have health insurance, either through their employers or a state-sponsored exchange, or face a fine beginning in 2014. (There are a number of exemptions to this rule.) This decision beat back the constitutional challenge to the health care law, known as the “individual mandate.”

During the announcement of the Court’s decision, Chief Justice John Roberts wrote “The federal government does not have the power to order people to buy health insurance, but it does have the power to impose a tax on those without health insurance.” Any fine imposed, will be considered a tax, collectible by the Internal Revenue Service, as a result of this decision.

Marcum will continue to provide updates as to the impact of this legislation and the U.S. Supreme Court’s decision. Should you have any question related to the decision or how this law may affect you, please contact your Marcum Tax Professional.

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