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Net Unrealized Appreciation is not subject to the 3.8% surtax

Image courtesy of Matt Banks at

Image courtesy of Matt Banks at

When you take advantage of the Net Unrealized Appreciation (NUA) treatment for stocks transferred from your employer retirement plan, you need to fully understand the tax treatment both when you transfer the stocks and when you eventually sell the stock.

Stock that you’ve chosen to treat with NUA tax treatment has three potential tax components -

  1. The basis of the stock – this is the original purchase cost of the stock, which is subject to ordinary income tax the year when you transfer the stock from the employer’s plan into your brokerage account.
  2. The Net Unrealized Appreciation – this is the difference in the total value of the stock minus the basis (from #1 above) on the date that you transfer it from your employer’s plan. This amount is not taxable until you sell the stock, and then it is taxed at long-term capital gains rates, no matter how long you’ve owned the stock.
  3. The non-NUA appreciation – this is any gain that has occurred in the value of the stock after you transferred it into the brokerage account, up to the date that you sell the stock.  This amount is taxed at short-term capital gains rates if held less than 1 year after the transfer, or long-term capital gains rates if held more than 1 year.

Here’s an example:

Ed has worked for ABC company for 30 years and will retire this year.  He has built up a 401(k) plan worth $500,000, of which $100,000 is stock in ABC company.  The basis of this stock, which he’s purchased over the years, is $75,000.  Ed wants to take advantage of the NUA provision for treatment of his ABC stock.

Ed transfers the $400,000 balance of his account that is not ABC stock into an IRA.  He then transfers the $100,000 of ABC stock into a brokerage account (non-IRA).  For the year, Ed must include the basis of the ABC stock ($75,000) as ordinary income on his tax return.

Later, when Ed is ready to sell his ABC stock, six months have passed, and the stock has increased in value to $115,000.  Ed sells the stock, and when he files his taxes for that year, he will have long term capital gains of $25,000 of NUA gain, and then short-term capital gains of $15,000 (the gain since he transferred the funds to the brokerage account).  If more than 1 year had passed, the NUA gain and the additional gain would all have been considered long-term capital gains.

In a nutshell, that’s how NUA treatment taxation works. Or rather, how it used to work, but there’s more to it now since the passage of the Affordable Care Act.

0.9% Additional Medicare Tax on Earned Income

First of all, the basis amount (#1 above) is subject to ordinary income tax.  This brings up the question – if your income is above the limits as a result of this distribution and newly-recognized ordinary income, will it also be subject to the additional 0.9% Medicare tax on earned income?  The answer is no – this basis is treated as a distribution from your retirement account, and since your contributions were already subject to Medicare taxation, this is not subject to further taxation for Medicare purposes.

3.8% Medicare Surtax on Unearned Income

Secondly, given that upon the sale of the stock you’ll have (potentially) significant unearned income, you might wonder about the new 3.8% Medicare surtax on unearned income – does this apply?  Yes and no.

The “no” applies to the NUA as of the transfer into the taxable brokerage account (#2 from above).  This amount will not be included if you have unearned income that is subject to the 3.8% Medicare surtax.

The “yes” applies to the additional capital gains that have occurred in the account since you transferred it to the brokerage account.  This amount can potentially be subject to the 3.8% Medicare surtax, if you are otherwise subject to this tax, on top of the capital gains treatment.  From our example above, Ed’s additional gain of $15,000 would have this potential additional tax.

What about a loss?

If you experience a loss after the transfer into the brokerage account (the value becomes less than the basis, in other words) and you subsequently sell the stock, the loss is treated as a long-term capital loss, the same as any other capital transaction.  If the loss was experienced before you distributed the stock from the account – that is, upon the distribution the value of the stock was less than the basis – you may be able to deduct the loss as a miscellaneous itemized deduction, subject to the 2% floor.

Medicare Part B and D Premiums for 2014


B (Photo credit: Flооd)

Even though other retirement-related items increased for 2014, such as the taxable income limit for Social Security tax ($117,000, up $3,300), the earnings limits for pre-Full Retirement Age Social Security benefits ($15,480 before FRA year, $41,400 during FRA year), and the COLA for Social Security benefits (+1.5%), the premium for Medicare Part B coverage remained the same for 2014, at $104.90 per month.

However, if your income in 2012 was above $85,000 for single filers or $170,000 for married filers, you will have to pay more for your Medicare Part B insurance, but it’s the same increase as in 2013.  Medicare Part D coverage for upper income folks will rise slightly.  The maximum increase for both Part B and Part D tops out at $300.10 per month, for a total premium of $405 per month.

This income amount is actually your Modified Adjusted Gross Income, which is equal to your regular AGI (bottom line on the first page of your 1040 tax return) plus tax-exempt interest, foreign earned income, and Series EE US Savings Bonds that were used for education (and which would otherwise be non-taxed).

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Medicare Part B

English: image edited to hide card's owner nam...

English: image edited to hide card’s owner name. author: Arturo Portilla (Photo credit: Wikipedia)

The next letter in our Medicare alphabet soup is Part B. Part B is essentially medical insurance that covers doctor’s services, outpatient care, home health services, and durable medical equipment. It will also cover some other services as well as well as many preventative services.

As far as what doctors will and will not cover Part B depends on whether or not they have agreed to assignment. Assignment is simply your doctor or another health care provider agreeing to be paid directly by Medicare and be willing to accept the payment amount that Medicare decides is the value of the service. Agreement also means the doctor or health care provider cannot charge you any more than what the deductible and coinsurance amounts are.

The basic cost for Medicare Part B for 2013 is $104.90 monthly. Individuals with higher AGI may end up paying more. The table below, courtesy of shows the increased amount based on AGI.

If your yearly income in 2011 was You pay (in 2013)
File individual tax return File joint tax return
$85,000 or less $170,000 or less $104.90
above $85,000 up to $107,000 above $170,000 up to $214,000 $146.90
above $107,000 up to $160,000 above $214,000 up to $320,000 $209.80
above $160,000 up to $214,000 above $320,000 up to $428,000 $272.70
above $214,000 above $428,000 $335.70

The standard deductible for Medicare Part B is $147 for 2103. Once the deductible is met, then any covered individual will pay 20% of any covered service. Medicare will pick up the other 80%. This is all that someone will pay out of pocket for services under a doctor or provider who has an agreement with Medicare. A person may end up paying more if their doctor is not in agreement.

Part B does not cover long term care nor does it cover custodial care. Other excluded services include routine dental and eye care, acupuncture, hearing aids and exams, and elective cosmetic surgery.

To enroll in Part B, you can ether choose to enroll or you may have been automatically enrolled. If you’re already receiving Social Security benefits then you’re automatically enrolled in Part A and B unless you decide to opt out of Part B. Possible reasons you may want to delay Part B coverage would be in the case of if you already have benefits through current employment or a union agreement.

Generally, should you choose to enroll in Part B, you’re allowed to do during the open enrollment periods. Usually you have 8 months to sign up for Part B coverage. Failure to sign up within the 8 month window may lead to you paying a penalty to sign up outside of the enrollment period.

Signing up for Part B also allows you and qualifies you to become eligible for a one-time 6 month open enrollment period for getting a Medigap policy. What does this mean? This means that you now have a guaranteed right to purchase a Medigap policy in your state regardless of your health status. We’ll talk about Medigap in a future article.

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Book Review: How to Retire Happy

How to Retire Happy

“The 12 most important decisions you must make before you retire”

Author Stan Hinden, who is the former syndicated Washington Post “Retirement Journal” columnist, has just released his Fourth Edition of this book.  The book is Hinden’s commentary and advice, as well as a sort of journal, as he and his wife Sara entered into and have been living in retirement over the past 17 years.  Hinden retired in 1996 at the age of 69, at which time he began writing the “Retirement Journal” column.  He was nominated for a Pulitzer Prize in Commentary in 1998 for his work.

This book is an excellent read for folks who are planning toward retirement or have recently retired.  Hinden has organized the process into 12 decisions, some of which include: “Am I Ready to Retire?”, “What Should I Do with the Money in My Company Savings Plan?”, and “Where Do I Want to Live When I Retire?”. Mr. Hinden then walks through each of the 12 decisions with his own personal insights and choices, as well as with expert recommendations and commentary on the subjects.

The book is a fairly quick read at 250 pages, and the writing style is simple and conversational.  The decision-points that Mr. Hinden discusses are thought-provoking, and he has been diligent to provide sources for additional review at the end of each Decision/Chapter.  Topics covered include income taxes, pensions, retirement accounts, Social Security, Medicare, long-term care insurance, and many other categories pertinent to retirees.

The author’s wife, Sara, became afflicted by Alzheimer’s Disease in 2007, which has resulted her needing to be placed in a residential nursing facility as the disease has progressed.  This was a particularly difficult section for me as I very much empathized with Mr. Hinden as he was faced with the difficult decisions associated with his wife’s condition.  In a similar fashion, the author discusses the issues that he faced with his own health after learning that he needed a four-way heart bypass shortly after his retirement.  These insights that are brought forth are very helpful though, as we all must consider that such decisions may likely be a big part of our own lives.

I will recommend this book to any and all folks who are looking for insights as they approach retirement.  It will definitely give you additional insight as you take on this next step in your life – what Hinden mentions is likely the “final quarter” of your life.  He points out though, that this final quarter needn’t “sound grim.  In any football game, the last quarter is often the most exciting.  The same can be true of retirement.  It is one more chance to add points on the scoreboard of your life.”

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

The ABC’s (and D’s) of Medicare



With more and more baby boomers retiring, more and more people including the Boomers, and their children and families are going to have questions and concerns about Medicare. Questions can range from what Medicare is, what it does, what it doesn’t do, and the nuances that make up our nation’s health care for retirees.

Medicare was created in 1965 by the Social Security Act and was signed into law by Lyndon Johnson.

Currently, Medicare is funded via taxation and premiums paid by Medicare subscriber. Part A – which we will cover in a future article, is funded by a 2.9% tax on wages. Unlike Social Security tax that has a limit or cap on the amount of income that can be taxed ($110,100 in 2012 and $113,700 in 2013), Medicare has no such wage base. The 2.9% tax is on an unlimited amount of earnings.

Eligibility for Medicare typically starts for those who turn age 65 and are permanent citizens of the US. Persons are automatically enrolled at age 65 if they have yet to start collecting Social Security. Persons electing to receive Social Security benefits before their full retirement age (FRA), must enroll manually in Medicare at age 65. Persons can also be eligible for Medicare based on having a disability covered under Social Security for 24 months, end-stage renal failure (requiring dialysis), and amyotrophic lateral sclerosis (ALS – Lou Gehrig’s Disease). Finally, Medicare is available for covered railroad workers receiving Railroad benefits.

According to, enrollment is set to hit 78 million people by 2030 – as the majority of baby-boomers will be enrolled.

Medicare is broken down into three parts: A, B and D. Wait a second. Didn’t we skip a letter? Yes. We’ll talk about Part C or Medicare Advantage a little later on. Next time, we’ll talk about Part A.

IRA Distributions Are Not Subject to the New 3.8% Surtax


As you may be well aware, beginning in 2013 there will be a brand spanking new tax added to unearned income if your Modified Adjusted Gross Income is greater than $200,000 for Singles, and $250,000 for Married Filing Jointly.  Married folks filing separately are affected above a $125,000 threshold.  This surtax is to help bolster the Medicare system, and it applies specifically to unearned income.

What’s important to know is that IRA distributions (among other things) are not included as impacted by this new surtax.  This means that when you make significant IRA distributions (beginning in 2013), such as to convert to a Roth IRA, this surtax will not be applied to your distribution.

Other types of unearned income that are specifically exempted from this surtax includes tax-free interest and other payouts from retirement plans such as 401(k) plans, deferred compensation plans, and pension plans.

Income that is subject to the new surtax includes interest, dividends, capital gains, annuities, royalties, and passive rental income.

None of these types of income are subject to the other brand spanking new tax – the 0.9% Medicare surtax on earned income.  This one is only applicable to wage income and income from self-employment, and it applies above the same income thresholds as those listed above.  Once an employee’s wages are above those levels, the additional 0.9% surtax will be withheld from the employee’s wages.  The employer does not have to pay a complimentary 0.9% as with all other Medicare tax payments.

For the self-employed, the surtax will be applied when you make your quarterly estimates or when you file Schedule SE at the end of the year.

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An Unexpected Result From Roth Conversion – Increased Medicare Premiums

Portrait of Increase Mather

Many folks took advantage of the one-time opportunity in 2010 to convert funds from traditional IRAs to Roth IRAs and subsequently spread the tax over the following two years, 2011 and 2012.  This was a very good option for some folks who wanted to do the conversion and reduce future tax costs.  However (and there’s always a however in life!), with the coming of 2013, many of these same folks are experiencing an unexpected result of the conversions: a significant increase in Medicare Part B premiums.

Beginning after 2003, Medicare Part B premiums have been partly determined by income – primarily higher income.  For 2013, the increased Part B premium begins for single folks with incomes above $85,000, married couples above $170,000.  The income used to calculate the Part B premium is always based on the most recent tax return, which in this case would be the 2011 tax return.

If you connect the dots, you’ll understand the reason this is now beginning to surface as an issue.  2011’s return is where the first half of those deferred Roth Conversions was reported, and so the increased income can cause a significant increase to Medicare Part B premiums.  It’s important to note that this impact is not limited to the 2010 conversions – any Roth Conversion can result in an increase to your Part B premiums in the future.

For example, let’s say Joe is an average retiree, with a pension income of $35,000 in normal years.  He’s 67 years old, having been on Medicare (Parts A & B) for the last two years.  Joe had a traditional IRA worth $200,000 in 2010, and he decided to opt for the Roth Conversion of the total account and two-year payment of the tax.  By doing this, he has to include $100,000 in his income for 2011 and 2012.  As a result, his income is increased to $135,000 for those two years; those two years are then used to determine the level of premium for Medicare Part B for 2013 and 2014.

For the past couple of years, Joe’s Part B premium has been less than $100 a month – not a pittance on his income, but still manageable.  Because of this increase to his income for 2011, his Part B premium will be increased to $209.80 per month in 2013 – double what it would have been, at $104.90.  The same will be true for 2014, and that rate will be set sometime in November, 2013.

The good news is that the increase is temporary, in these circumstances the individual’s premium should reduce again in 2015.  The bad news is that there’s nothing that can be done about it, barring a “life-changing event” that coincides with the increase in income.  If your spouse died or you left employment, for example, you could contact Social Security to have your situation reviewed and the possibly premium reduced, based upon income since 2011 (possibly projected income for 2013).

Listed below are the Medicare Part B premiums for married couples at various income levels:

Married Couples
Modified AGI is: 2013 Part B Premium
More than: But not over:
$170,000 $214,000 $146.90
$214,000 $320,000 $209.80
$320,000 $428,000 $272.70
$428,000 No Limit $335.70

And this table is for single folks:

Modified AGI is: 2013 Part B Premium
More than: But not over:
$85,000 $107,000 $146.90
$107,000 $160,000 $209.80
$160,000 $214,000 $272.70
$214,000 No Limit $335.70
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What Obamacare Will Do to Your Taxes

President Barack Obama's signature

So, now that the Patient Protection and Affordable Care Act (PPACA, aka “Obamacare”) has been upheld by the Supreme Court, we need to face up to the tax changes that are inherent in this piece of law.  Like it or not, the IRS is going to have a large role in enforcing the provisions of this law.  Listed below are some of the major impacts that we as taxpayers will experience.

Healthcare Deduction Limit

Before PPACA, through the end of tax year 2012, healthcare expenses are deductible to the extent that they are greater than 7.5% of your Adjusted Gross Income (AGI).  AGI is the bottom line on the first page or the first line on the second page of your Form 1040.

The change coming for tax year 2013 is that the limit is now going to be 10% of your AGI.  So, if you have an AGI of $80,000 and deductible healthcare expenses of $10,000 – in 2012 this would result in a healthcare deduction of $4,000 ($10,000 minus $6,000 – where $6,000 is 7.5% of $80,000).  In 2013, this deduction for the same expenses would be reduced to $2,000 ($10,000 minus $8,000 – where $8,000 is 10% of $80,000).

This is likely the tax change that will impact the most people – of nearly all tax brackets.  For 2013 this change will only impact filers under age 65 – those folks will experience the new limit beginning in 2017.

Medicare Wage Surtax

For single filers with incomes above $200,000, a new payroll tax will be applied to income above $200,000.  The same applies for couples with joint income above $250,000.  This payroll tax is equal to 0.9% of the income in excess of the $200,000 or $250,000 level.

Medicare Unearned Income Surtax

With the same levels as above ($200,000 and $250,000) applied to Modified Adjusted Gross Income (AGI), there will be an additional 3.8% Medicare surtax.  This is applied to the lesser of the taxpayer’s net investment income or the excess Modified AGI above the limits.

Modified AGI is defined in this case as AGI plus tax free foreign income.  Investment income includes all interest, dividends, capital gains, annuities, royalties and passive rent income, but does not include tax free interest or (very importantly) distributions from retirement plans.

Note: This is the tax that is often referred to as the “tax on the sale of your home”.  See the article Tax On the Sale of Your Home Email Myth for more details on why this is mostly bunk – there are real impacts to this bit of tax law, just not what is described in the email.

Flex-Spending Account Caps

Healthcare Flex-Spending Accounts will be subject to a cap of $2,500 in annual deductions with the new law.  Before there wasn’t a specific cap, but you were also required to use up the deferred amounts within 3 months of the end of the year.  The jury is still out on whether or not the “use it or lose it” provision will be removed with the new cap – recommendations have been put forth to allow taxpayers to carry over unused amounts, but none have made it to law as of yet.

Penalty for Uninsured

In addition to all of the above, folks who choose to remain uninsured will be subjected to a penalty of the larger of $95 or 1% of income above the threshold that requires the individual (or couple) to file an income tax return.  For a family in 2013, this penalty is capped at $285.  The cap for the penalty will increase gradually (albeit steeply) over the next few years to a maximum of $2,085 in 2016.

Folks in the lower strata of incomes (generally less than household income of around $96,000) will receive tax credits to help them pay for insurance coverage.  The way this credit works too complicated to go into here, but an example would be for a family of four with an income of $48,000 would receive a credit of roughly $11,000 toward healthcare insurance coverage.

Penalty for Companies Not Providing Insurance to Employees

If a company with 50 or more employees provides no insurance to its employees or the insurance provided is substandard or too costly, there is an additional penalty to the company.  The penalty is stiff: $2,000 times the number of employees, with a 30-employee offset.  This penalty will apply if even one employee goes outside of the company-offered plan to an insurance exchange for coverage.

Excise Tax on Medical Devices

Many medical devices, such as wheelchairs and prosthetics (an official list is forthcoming from FDA), will be subject to a new excise tax of 2.3%.  This will not be applied to items that are typically sold in a retail setting, such as eyeglasses, contact lenses, and hearing aids.

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The “Tax on Sale of Your Home” Email Myth

Image by Sean MacEntee via Flickr

If you have an email address (and let’s face it, who doesn’t?), you’ve likely received this email.  In case you haven’t received it, there’s an email that is being forwarded around the internet about a new tax on selling your home – I get at least one of these a month it seems. I’ve copied the text of one of the emails below. This article is to help you understand why the email is a misguided myth, partly grounded in truth but not applicable for most folks.

The email is usually forwarded at least a half-dozen times by the time you receive it, making it difficult to know where it started from.  In addition, the text of the email is often in large, bold, red font in places, such that you can almost feel the spittle coming off the page at you.

Here’s the email:

Will you ever sell your house?
Did you know that if you sell your house after 2012 you will pay a 3.8% FEDERAL sales tax on it?

That’s $3,800 on a $100,000 home etc.

When did this happen? It’s in the health care bill. Just thought you should know.

SALES TAX TO GO INTO EFFECT 2013 (Part of HC Bill)  Why 2013? Could it be to come to light AFTER the 2012 elections?


So, this is “change you can believe in”?

Under the new health care bill – did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 If you sell your $400,000 home, the re will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Does this stuff make your November and 2012 vote more important?

Oh, you weren’t aware this was in the obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either

<web address deleted>

Why am I sending you this? The same reason I hope you forward this to every single person in your address book. VOTERS NEED TO KNOW. 

Okay, so here are the facts:

It is a fact that under the Patient Protection and Affordable Care Act of 2010 there is a new 3.8% surtax on unearned income for folks above certain income levels.  I wrote about this surtax in relation to Roth conversions last year, but I didn’t go into detail about this email myth – I hadn’t started receiving them with the frequency that I have lately.

So the kernel of truth in the email is that some home sales could be impacted by this new surtax.  The real truth though is that in the case of a home sale, if the taxpayer has lived in the home for 2 out of the previous 5 years, up to $250,000 of gain in the value of the home is exempt from taxation.  The exclusion of gain amount is doubled to $500,000 for a married couple filing jointly who both meet the “2 out of 5” test.

The other test that would have to be met in order for a home sale to be hit with the surtax is that you have Modified AGI in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately, or $200,000 for single and head of household filers.  If you don’t have income above that level, the surtax would not apply to you at all.

In other words, the situation described by the email could come about if you had an income greater than the levels outlined above, and one of the two circumstances below is met for the home sale:

  • You own a home that you and your spouse have lived in for at least 2 out of the previous 5 years and the home has appreciated more than $500,000 in value (or $250,000 for single filers); or
  • You own a home that you have not lived in during the previous 5 years that has appreciated in value in any amount.
  • Note: If you lived in your home less than 2 years out of the previous 5, the exemption is pro-rated.  For example, if you lived in the home only 1 year out of the previous 5, half of the exemption would be available.

I doubt if many folks will come anywhere near meeting those circumstances.  It’s not impossible, but I think far less possible than the email leads you to believe, and the surtax certainly does not apply to ALL real estate sales.

Don’t get me wrong, I don’t want extra taxes imposed in these circumstances, either.  I do think people should know about this tax, but I want them to understand the tax in the correct context.  If you’d like more information on this myth, see what Snopes has to say about it.

Feel free to forward this link to anyone and everyone on your email list, so that the corrected word gets out.  Voters do need to know.

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