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New 3.8% Medicare Tax on S Corporation Income in 2013

4/15/2010

The Patient Protection & Affordable Care Act Reconciliation Agreement will add a new 3.8% Medicare tax on investment income, including S corporation income beginning in 2013. The tax will be assessed on the lesser of an individual’s net investment income for the year or the amount of the individual’s modified adjusted gross income in excess of $200,000 for singles and $250,000 married filing jointly.

Net investment income is defined as income from interest, dividends, annuities, royalties, rents and income from passive activities. Passive investors in S corporations will be subject to the new Medicare tax on income in excess of the thresholds. Active investors (generally more than 500 hours of participation) will not be subject to the tax, except on dividends, capital gains and rental income.

The tax is at the shareholder level so S corporations financial institutions may decide to increase dividend levels in 2013.