Archive for October, 2011

Medicare Tax On High Earners’ Investments

Posted on: October 27th, 2011 by Lawrence A. Friedman

Beginning in 2013, people with higher incomes will pay a 3.8 percent Medicare surtax on net investment income such as interest, dividends, rents, net capital gains on investments, and certain other income. However, net investment income doesn’t include tax exempt municipal bond interest, annuity distributions, distributions from IRAs and qualified plans, and various other kinds of income. The surtax only applies to the lower of net investment income or the excess of modified adjusted gross income over thresholds that vary by filing status (e.g. $200,000 single persons, $250,000 married persons filing jointly). The tax also can apply to trusts and estates with undistributed net investment income.

Since the surtax isn’t effective until 2013, accelerating income (especially investment income) into 2012 can generate significant savings. For instance, if you are considering converting a regular IRA to a Roth IRA, it may be beneficial to convert in 2012 rather than 2013 to avoid the surtax. By the same token, it may be beneficial to sell in 2012 assets with substantial built-in capital gain that otherwise would be liquidated in the next few years. Similarly, exposure to the surtax can be lessened through strategies that reduce modified adjusted gross income generally. For instance, investments that generate income subject to the surtax can be sold and proceeds invested in municipal bonds. Maximizing contributions to 401(k) plans, IRAs, other tax favored savings, and cafeteria plans all serve to reduce income.

In short, higher income taxpayers will face a significant Medicare surtax beginning in 2013, but advance planning can limit the exposure. FriedmanLaw can guide you to develop effective plans to limit the impact of the Medicare surtax and realize your overall tax and estate planning goals.

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Medicare Announces Set Asides Unnecessary in Some Personal Injury Settlements

Posted on: October 4th, 2011 by Lawrence A. Friedman

An individual who currently receives Medicare or reasonably expects to become eligible for Medicare in the next 30 months must protect Medicare’s interests when resolving a worker compensation (WC) or personal injury (PI)claim. In other words WC and PI recoveries rather than Medicare must fund care necessitated by a work accident or other injury.

Medicare recipients must repay Medicare payments occasioned by a work accident or personal injury when the WC or PI award is paid. Otherwise, Medicare can recover from the Medicare recipient personally and/or from others involved in the case such as Medicare recipient’s attorney. A few years ago, Congress clarified the Medicare Secondary Payer Act to make this repayment obligation crystal clear.

In addition to reimbursing Medicare for prior expenditures, an individual who recovers at least $25,000 (current Medicare participant) or $250,000 (reasonably expected to be eligible for Medicare in next 30 months) must pay for future care occasioned by the work or other injury to the extent of damages for medicals. Unless the individual includes reasonable arrangements to protect Medicare’s future interests in resolution of his/her claim, Medicare may treat an entire redovery as damages for medicals. Therefore, it is foolish to ignore Medicare’s future interests when settling WC and PI claims.

Because it can be tricky to anticipate whether an arrangement reasonably protects Medicare’s future interests, Medicare has developed a complex rubric to determine an appropriate amount to set aside from WC recoveries for future care. While there is no similar procedure for PI recoveries, the WC guidance can serve as a starting point in both kinds of cases. In addition, on Sept. 30, 2011, Medicare issued a memorandum stating that Medicare will not require any set aside or other arrangement where the Medicare participant’s treating physician certifies in writing that treatment for the injury giving rise to the PI recovery has been completed as of the recovery date and no future care will be required. Medicare’s memorandum is available at To subscribe to this blog, click on one of the RSS buttons to the left and then click on the subscribe button.

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Homepage photo: Cows grazing at Meadowbrook Farm, Bernardsville, NJ by Siddharth Mallya. October 23, 2012.
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