High-income traders are hit with ObamaCare’s 3.8% Medicare tax on investment income

Discussion in 'Economics' started by Robert A. Green, Sep 5, 2012.

  1. High-income traders are hit with ObamaCare’s 3.8% Medicare tax on investment income

    September 5, 2012

    Other advisers who suggest traders might be able to avoid the new Medicare tax on unearned income with an S-Corp are wrong. This primer for traders and investment managers offers planning tips surrounding the new Medicare taxes.

    By Robert A. Green, CPA

    The Patient Protection and Affordable Care Act (ObamaCare) makes a big political point of raising taxes on the rich — defined as individuals with adjusted gross income (AGI) exceeding $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately) — and on the investor class, too. On Jan. 1, the first revenue raisers — the Medicare tax hikes on earned and unearned income — kick in. (The more contentious health-insurance mandate or tax penalties don’t start until 2014.)

    The current Medicare tax rate of 2.9 percent applies to all earned income. But if you’re in one of the previously stated income groups, a new 0.9 percent Medicare hospital insurance tax raises this rate to 3.8 percent.

    The more significant ObamaCare tax issue is this: Starting in 2013, the 3.8-percent Medicare tax will be applied to unearned income, too, for individuals exceeding these income thresholds. (Technically, it’s modified AGI, which means U.S. residents abroad must add back any foreign earned income exclusion reported on Form 2555.)

    Unearned income includes investment or portfolio income (interest, dividends, most capital gains, and annuities), royalties, rents, and passive activity income, as well as gains from the sale of property not used in an active business.

    The 3.8-percent Medicare tax on unearned income doesn’t apply to qualified plan distributions (retirement plans) or income from the disposition of, or pass-through from, active (earned-income related) LLCs, partnerships, and S-corps, among other revenue sources. But it does apply to taxable income of trusts with undistributed net income in excess of the dollar amount at which the highest tax bracket for trusts begins (this amount is $11,650 in 2012).

    While the Medicare tax on earned income is 50-percent tax deductible, it is not deductible on unearned income. Employers pay half the 2012 Medicare tax and withhold the other half from employees’ paychecks. Investors have to pay the tax on unearned income through estimated taxes and with their tax balance due.

    Planning tips: Selling profitable investment positions before year-end 2012 and accelerating other unearned income could be a wise tax move if you know you are going to be over the $200,000/$250,000 income threshold in 2013, triggering the Medicare tax. Plus, if Bush-era tax cuts expire, ordinary, qualifying dividend, and capital gains tax rates will rise in 2013, too.

    As is the case with self-employment tax calculations, the Medicare tax on unearned income is assessed on net investment income. That’s defined as net trading gains — proceeds minus cost basis on securities — less “properly allocable” expenses. For traders and investors, these allowable expenses include trading expenses. For business traders, all trading expenses are deducted on Schedule C or on a pass-through entity tax return. For investors lacking trader tax status, Section 212 investment expenses don’t include education, home office, and some other expenses.

    Click for entire blog article http://tinyurl.com/bmpybzy

    A version of this article appears in Active Trader’s November issue, on newsstands in October.
  2. i assume this will mean that people with unearned income only will now qualify for medicare?
    if so shouldnt they pay something in?

    its been a nice perk us traders have had all these years not having to pay fica or ss taxes but to be honest in terms of fairness i cant think of a good argument why we shouldnt be paying it.
  3. Good point about Medicare benefits. I wonder if Medicare benefits will be means tested for high income people in retirement. With the entity strategy, traders can pay into social security and Medicare both, getting more income tax savings than they pay in SE tax costs.
  4. My guess is you've leached a lot more out of taxpayers than you've added to the pot. Nice try posing as a successful trader who writes like a texting teen.
  5. Just insane. It amazes me how easily the left accepts tyrannical government. When the US Government shuts down the over 25 Trillion handed out to banks then we can look at tax changes. In the meantime, I will continue to go outside of US for my trading systems.

    Not another dime from me over what they already get. No more feeding the corrupt and criminal agendas.
  6. you aint too bright. medicare is a good deal even as a trade. i make a small investment. in exchange i will be guaranteed some kind of healthcare in my old age.
    i will say this. even if you are not required to it is foolish to not find a way to pay in enough to qualify for minimum medicare benefits.
  7. It's OK so long as they expect a check.

  8. One can always pray to the Lord to cure all ailments.
  9. Hell of a lot safer than government controlled health care. The Insurance industry wrote the obamacare bill to lock in the rigged scam for good. Now taxpayers will be bent over to feed the next financially dysfunctional corporate/government invasion of the economy.

  10. Medicare is peanuts compared to the monies wasted in militarily exporting our version of corporate controlled democracy. Taxpayers continue to be bent over for Trillions in black military funding. With military spending you get squat, at least with medicare you get a proctologist to look up your ass as the govt rapes it. (And don't give me the bs how all that black hole military spending is protecting my freedoms, because it isn't. Go wave the flag somewhere else)
    #10     Sep 5, 2012