July 20, 2017

Continuation of 3.8% Surtax and Itemized Deductions

Along with the collapse of the U.S. Senate negotiations over health care policy, it appears that a related 3.8% surtax will remain in effect for now. The 3.8% surtax took effect in 2013 as part of the Affordable Care Act (Obama Care). It imposes an additional tax on investment income of high-income taxpayers to pay for increased medical costs under the law. The surtax is assessed on net investment income above a taxpayer’s adjusted gross income of $200,000 for single individuals and $250,000 for married couples filing jointly. The aforementioned thresholds are not adjusted for inflation.

In a separate initiative, the Trump Administration has initially proposed eliminating most itemized deductions except for mortgage interest and charitable contributions. Under current law, some of the targeted deductions can reduce a taxpayer’s net investment income subject to the 3.8% surtax. If the Administration is successful in eliminating deductions and the 3.8% surtax remains in effect, many taxpayers could see an increase in their tax liability.

While net investment income does not include taxable payments from pensions, traditional IRAs, and Social Security, these do increase adjusted gross income. This could push a taxpayer’s adjusted gross income over the threshold, subjecting any net investment income also received during the year to the surtax.

If you have questions or need assistance on tax issues, please contact Maddox Thomson & Associates for assistance.