The Basics on Medicare Surtax

September 30, 2013. In the wake of the questions, concerns, and significant changes prompted by the Patient Protection and Affordable Care Act – which you likely know as Obamacare – there is an often overlooked and surreptitious Medicare surtax imposed by Section 1411 of the Internal Revenue Code. While the tax applies to individuals in and of themselves, it also applies to an estate or trust.

Though as with all things in the Internal Revenue Code the picture is more complex than I am making it out here, a simple explanation of Section 1411 is that there is now a 3.8% Medicare tax on passive income. That tax applies to undistributed Net Investment Income (NII) over a threshold hold amount, which in 2013 is $11,950. As it is defined, NII is generally income from interest, dividends, annuities, rents, royalties, and income from investments in businesses which you do not actively participate. This increase is going to have some, if only a moderate, effect on one’s estate plan.

Mitigating measures to consider would be developing a family limited partnership (or FLP), moving assets in to a tax-exempt form, or distributing income via the trust to lower-income beneficiaries. Other strategies to consider are deferred annuities, life insurance, and charitable remainder trusts. For more information on estate planning, contact the Goosmann Law Firm at info@goosmannlaw.com or by calling 712.226.4000.