While there a probably a couple dozen definitions of MAGI, the Medicare surtax does not include consideration of MAGI, just AGI off the tax return with a couple additions. So while the distributions from retirement plans will not be subject to the tax, they are included in AGI (but not qualified Roth distributions) and can push AGI over the limit. Then the investment income that is subject to the surcharge is exposed. Here is a brief explanation:

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The UIMCT broadens the Medicare tax base for higher-income taxpayers by imposing a 3.8% surtax on the lesser of: (1) “net investment income”; or (2) the excess of adjusted gross income [AGI], increased by any foreign earned income otherwise excluded from AGI, over the taxpayer’s threshold amount. For single and head-of-household taxpayers the threshold amount is $200,000. For married couples filing a joint return, and surviving spouses, the threshold amount is $250,000. For a married person filing a separate return the threshold amount is $125,000. Neither the $250,000 threshold amount nor the $200,000 threshold amount is indexed for inflation.

The term, “net investment income,” includes interest, dividends, royalties, rents and capital gains, less deductions properly allocable thereto. However, the term does not include income earned from a trade or business unless the business is considered a passive activity for income tax purposes. Furthermore, net investment income does not include distributions from qualified retirement plans, such as employer-sponsored defined benefit plans, profit sharing plans, money purchase plans, ESOPs, 401(k) plans, 403(b) plans or 457(b) plans, nor does such term include distributions from an individual retirement account (IRA) or tax-exempt municipal bond.

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Q – how did they miss tax exempt income for additions to both AGI AND for investment income? Perhaps a concession to state and local governments?

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