The Alternative Press

Identify the surtax income thresholds. The first step is to know the MAGI (modified adjusted gross income) thresholds to avoid the 3.8% surtax on net investment income. They are as follows: Married Filing Jointly ($250,000); Individuals ($200,000); Married Filing Separately ($125,000); Trusts and Estates (approximately $12,000). Trusts and estates are hit particularly hard with the surtax kicking in at a much lower income level.

Look at TAXABLE income. Taxable income from all sources can push taxpayers over the MAGI threshold and cause their investment income to be subject to the 3.8% surtax. Income tax-free Roth distributions will NOT affect MAGI.

Understand how much will be taxed. The 3.8% surtax is imposed on the lesser of (1) net investment income or (2) the amount of MAGI over the certain income threshold. Taxpayers with income below those MAGI levels will NOT be subject to this tax.

Know other health care tax provisions coming in 2013. The 3.8% surtax gets the attention, but there is also an additional 0.9% Medicare tax on wages and self-employment income over the MAGI thresholds. Also, medical expenses must exceed 10% of AGI (up from 7.5%) to be deductible (if age 65 or older, effective in 2017). That 10% also applies to the medical expense exception to the 10% penalty on early IRA or plan withdrawals.

Discuss these tax planning points. You need to know that while IRA and plan distributions are exempt from the surtax, taxable distributions from these accounts can push income over the MAGI thresholds. 2012 Roth conversions are valuable as a vehicle to eliminate future taxable income and for taxpayers with a discretionary trust as their IRA beneficiary who are staring at harsh trust tax rates. Note, salary deferrals [401(k)s for example] can reduce MAGI for the 3.8% surtax but NOT for the 0.9% additional Medicare tax.