It may have seemed a ways off when this provision was first introduced into the tax code, but starting in 2013, couples filing jointly with more than $250,000 of Modified Adjusted Gross Income (MAGI) ($200,000 for single filers) will owe a 3.8% Medicare tax on the lesser of net investment income—including interest, dividends, capital gains, annuities, rents, and royalties—or MAGI over the threshold.
Fidelity Investments provides the following helpful example: If you and your spouse had a total MAGI of $275,000—with $225,000 coming from earned income and $50,000 from investment income—you would owe the Medicare tax on the amount of investment income equal to your MAGI over the $250,000 threshold, or $25,000. On the other hand, if your $275,000 in MAGI consisted of $260,000 in earned income and $15,000 of investment income, you would owe the 3.8% tax on just $15,000.
You can minimize your exposure to this new tax by holding your income-paying investments in tax-advantaged accounts, such as your IRA or 401(k). Of course, that income ultimately would be taxable when withdrawn in retirement.
There is no easy way to decide whether to pay Uncle Sam now or pay him later. To evaluate your situation, you need to make some long-term projections on both your earnings and future tax rates. You might also consider converting your IRA to a Roth IRA where qualified withdrawals are tax-free.