The new Medicare surtax applies on the lessor of:
Net investment income, or
The amount of adjusted gross income in excess of $250,000 ($200,000 single)
Investment income comprises primarily interest, dividends, annuities, rents, passive income and capital gains. Let’s assume a farm couple has schedule F income of $300,000, interest, dividends and capital gains totaling $25,000 and cash rents of $150,000. First step is to determine their total income which is $475,000. This amount less $250,000 equals $225,000. That is the maximum that would be subject to the tax. Their investment income is $25,000 plus $150,000 or a total of $175,000. This amount is less than $225,000, therefore, their Medicare surtax is $175,000 times 3.8% or $6,650.
Their schedule F income is subject to regular self-employment tax on the first $250,000 of farm income. The excess of $50,000 would be subject to the additional .9% Medicare surtax or an additional $450. Therefore, the total extra Medicare tax for 2013 is $7,100.
Now lets assume their schedule F income is only $150,000. Their total income would be $325,000 which means the maximum amount subject to the 3.8% tax is only $75,000 or $2,850.
In brief, if your adjusted gross income is less than $250,000, you will not be subject to the tax. If you are over this amount, most likely some of your income will be subject to the tax.
You will also be able to offset part of your investment income with certain itemized deductions.
This Medicare surtax most likely will be around no matter what happens with the Fiscal Cliff situation.