Q&A on 3.8 percent tax on annuity incomeArticle added by Kim O'Brien on April 13, 2010
Kim O

Kim O'Brien

Washington, DC

Joined: October 13, 2006

Congress just passed the Health Care Reform Bill and the President signed it into law, but what does it have to do with annuities? Plenty. The Senate's reconciliation bill included a 3.8 percent Medicare tax on unearned income including annuities, and possibly income recognized from the surrender or sale of life insurance.

This will hit many small business owners whose businesses are not incorporated. The tax credits aren't enough to make up for the tax hikes because many small businesses won't qualify for them. (Also, the credits are temporary.)

Since sending out the NAFA Regulatory Alert, the organization has received many additional questions from its members. Here are some of the most frequently asked, along with our answers.

Q: Is the Medicare tax on annuities a done deal?
A: Yes, for now. It was part of the Senate Reconciliation Bill that the President signed into law late last month.

Q: What is it taxing, exactly?
A: As it is written today, the 3.8 percent tax is imposed on all "net investment income" for single tax filers reporting income over $200,000 and joint tax filers reporting income over $250,000.

Q: What is meant by "investment income?"
A: The text of the bill states that the term means "the excess (if any) of the sum of (i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of trade or business..."

Q: Does it include qualified and non-qualified annuities?
A: The bill provides an exception for distributions from qualified plans.

Q: What is the effective date of this new tax?
A: The bill states it is effective for tax years beginning after December 31, 2012.

Q: What is NAFA's position?
A: NAFA opposes the tax and coordinated Joint Trade Partners to take the lead on opposing the tax. On March 25, NAFA sent letters to Senator Harry Reid and all remaining 99 Senators, and will continue to work to remove it before its effective date.

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