1. ©2015, College for Financial Planning, all rights reserved. Session 16 Medicare Contribution Tax & Planning Issues CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

2. Session Details Module8 Chapter(s)3 LOs8-6 Analyze a situation to calculate the alternative minimum tax, or Medicare Contribution tax, for individual taxpayers. 16-2

3. Medicare Contribution Tax The tax is 3.8% of the lesser of the o net investment income, or o the excess of the modified AGI (MAGI) over the specified threshold amount Net investment income o investment income reduced by penalty on the early withdrawal of savings investment interest expense Tier II investment expenses after 2% of AGI Also known as “Net Investment Income Tax” 16-3 Filing StatusThreshold Single$200,000 Head of household$200,000 Married filing jointly$250,000

4. Medicare Contribution Tax Investment income includes gross income from: Interest, substitute interest Dividends, substitute dividends Annuities (nonperiodic and annuitized distributions) Net capital gains, net royalties, net rental income Passive business income Specifically not included in investment income: Muni bond interest Income from active trades or businesses Income from qualified plans—including 401(k)s, 403(b)s, IRAs, Roth IRAs, and 457 plans 16-4

5. Planning Issues Reduce Net Investment Income (NII) o Munis o Tax-efficiency of mutual funds/ETFs o Loss harvesting o Passive business income to material participation Traditional Planning—Reduce AGI or Taxable Inc. o Exclusions—Roth and Munis o Deductions—Retirement plans, HSAs, FSAs o Income Shifting o Deferral—529s, Coverdells, and Annuities(?!) o Bunching 16-5

6. Review Question 1 The Medicare contribution tax does not apply to which one of the following? a.Annuitized distributions from a commercial annuity b.Qualified distributions from a Roth IRA c.Taxable interest income d.Qualified dividend income 16-6

7. Review Question 2 Mike and Linda are married taxpayers filing a joint tax return. In the current year, their AGI is $350,000, and their investment income (included in the AGI) is $90,000. They have investment interest expense of $6,000 and deductible Tier II investment expenses (after the 2% of AGI limitation) of $4,000. Calculate the Medicare contribution tax that they must pay. a.$0 b.$3,040 c.$3,420 d.$3,800 16-7

8. ©2015, College for Financial Planning, all rights reserved. Session 16 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning