How Can You Avoid the New 3.8 % Obamacare Tax

A TAX BY WHATEVER NAME IS STILL PAINFUL

Cropped Doctor Patient Pic copyWhatever the name, taxes can be painful and the new tax is known by a few: the Affordable Care Act tax, the Obamacare tax, the Net Investment Income Tax (NIIT), or Medicare Tax.  Most media (and even the President) is using the name “Obamacare Tax”, so we will use that name for this writing.  For a full Q&A on the new tax, please see our Q&A on NIIT aka Obamacare Tax.

This is a tax on UNEARNED INCOME.  Unearned income is defined as income derived from sources other than  employment, such as interest and dividends from investments, or from rental property (source: investorwords.com). The types of income that will be affected by the new Obamacare tax are.

  1. Investment income
  2. Dividend Income
  3. Passive income
  4. Income from the sale of property (unless you use that property in your trade or business)

What is Investment Income? In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (source: http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs)

“You don’t pay the Obamacare tax on your sweat income (what you earn through work in your trade or business).  The 3.8% Obamacare tax will apply to investment income if your modified adjusted gross income is greater than”¹:

  • $250,000 for married, filing jointly
  • $125,000 for married, filing separately
  • $200,000 for all other taxpayers.

The definition of “modified AGI” varies according to the purpose for which the related calculation is being used. These modified versions of AGI may add certain items to AGI that were excluded in computing both gross income and adjusted gross income. Common additions include tax exempt interest and the excluded portion of Social Security benefits.²

If you have no investment income – you don’t pay the 3.8% tax.
If your income is less than $200K  or $250K (for married),
you don’t pay the 3.8% tax.

Our job is to help you avoid paying more taxes, and if possible, reduce your overall tax liability. We can do this several ways depending on your income, your business deductions and expenses, your rental property, your filing status, and your investments.

Tax information is not tax advice.  Always speak with your tax professional before making decisions.  If you need to speak with a tax professional, give us a call today at 619-589-868.



¹Bradford Tax Institute.

² Wikipedia