Investors Beware: Medicare Surtax in Obamacare Tied to Capital Gains

Oct 03, 2013, 06:00 ET from NetWorth Services

PHOENIX, Oct. 3, 2013 /PRNewswire/ -- Between the melodramatic gamesmanship on Capitol Hill and the eerily empty offices of federal buildings around the country, there is the Affordable Care Act (otherwise known as Obamacare) at the center of a bitter political battle. As the last phases of the law become reality, what many investors may not realize is that the capital gains on investments are actually a part of the tax structure within the Affordable Care Act and are in effect for 2013. After the Washington sideshow is over, it the surtax provision that will become the focus of investing taxpayers and their tax professionals. The law includes a Medicare surtax of 3.8 percent that applies to investment income for those with an adjusted gross income of more than $200,000 for single filers and $250,000 for married joint filers. However, there is an additional component to the tax law that makes it even more important to lower the capital gains from your investments. The tax applies to either the normal income or the net income from investments, whichever is lowest.

The second half of the Medicare tax is an additional .9 percent. This number applies to the earned income over those same amounts of $200,000 for single and $250,000 for joint whereas the first tax applied to the lesser of gross income or investment income. So if Mr. Smith files a single return with a $210,000 income and a net investment income of $45,000, the total amount is $255,000. The tax on investment income will be on the lesser of two – either gross income or investment income. The amount Mr. Smith has exceeded the $200,000 threshold by is $10,000. Compared to the investment income of $45,000, the 3.8 percent tax will apply to the lower amount of $10,000 instead and total $380. The second half of the tax at .9 percent applies to the $10,000 that Mr. Smith exceeded over the $200,000 income limit and totals $90. This brings the total surtax provision for the health care law to $470.

"Reducing gains on your stock investments not only lowers your capital gains tax but a portion of the Medicare surtax as well," said Nico Willis, CEO of NetWorth Services. "One way to sell a stock to your utmost advantage is as simple as choosing the right sales methodology. Most people don't realize it but the default methods used by most brokerages are not the optimal choice for them, particularly when it comes to the tax consequences of the sale."

There are a variety of options available to the investor when a selection of shares in a stock is sold. Choosing the right tax lots from several purchases of one stock over time can make a tremendous difference in calculating the loss or gain from the investment. Options include FIFO (First In, First Out), LIFO (Last In, First Out) and so forth. The results can be significant using tax optimization strategies. "There are some very effective tools online to help you make the best sales methodology decisions," said Willis. "Strategically managing your capital gains just became more important than ever."  

However the drama plays out, the Affordable Care Act and the tax provisions will remain law. "Be prepared," added Willis. "With the right planning, you can minimize the impact on your gains."

NetWorth Services is a SaaS (Software as a Service) financial and database software company.  Headquartered in Phoenix, the company has offices in Philadelphia and New York.  Its flagship product, Netbasis, is an award-winning application that quickly and accurately determines the adjusted cost basis for securities.  Financial solutions developed by NetWorth have been adopted by leading financial institutions, transfer agencies, tax preparation software companies, accounting firms, money managers, government agencies, Fortune 500 companies, universities, endowments and individual investors.  For more information visit and

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SOURCE NetWorth Services