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Julie Jason: A new investment tax is just around the bend

Published September 4, 2013 10:03 am

This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

I'm going to guess that the last thing you want to think about over the Labor Day weekend is taxes. But this fall, you may want to start planning so that you are not surprised by a higher tax bill as a result of the Affordable Care Act tax provisions that kicked in last January.

As usual, nothing is as simple as it should be. To help taxpayers understand the new law, the Internal Revenue Service website provides some key information. Let's focus strictly on the new investment tax, which affects taxpayers whose modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers).

The new 3.8 percent tax on Net Investment Income calls for a new tax form (IRS Form 8960). If you have NII, you'll also need to account for the extra tax in your estimated quarterly filings.

Here are some guidelines, which I have adapted from the IRS's Q&A on Net Investment Income.

• What is investment income? Generally, interest, dividends, capital gains, rental and royalty income, nonqualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer.

• What is Net Investment Income? Investment income is reduced by certain expenses, such as investment interest expense, investment advisory and brokerage fees.

• What is not NII? Wages, unemployment compensation, Social Security benefits, alimony, tax-exempt interest, self-employment income, and distributions from certain qualified plans, such as 401(k)s and traditional IRAs.

• What gains are included in NII? Those from the sale of stocks, bonds and mutual funds, investment real estate, partnership interests and capital-gains distributions from mutual funds.

• How is the NII tax calculated? A taxpayer who files singly has $180,000 of wages. The taxpayer also received $90,000 of NII. The taxpayer's modified adjusted gross income is $270,000, or $70,000 over the $200,000 threshold for single filers.

The NII tax is calculated on the lesser of $70,000 (see above) or $90,000 (NII). The NII tax is $2,660 ($70,000 x 3.8 percent).

• What about gains on the sale of a personal residence?

Gains are not included in NII if they are excluded from gross income for regular income-tax purposes. The first $250,000 ($500,000 in the case of a married couple) of gain is excluded from both gross income and NII.

Here is a real estate example provided by the IRS showing how NII taxes may be due on the sale of a personal residence. B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the past 10 years for $1.3 million. B and C's cost basis in the home is $700,000. B and C's realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 exclusion for married couples filing jointly). B and C have $125,000 of other NII, which brings B and C's total NII to $225,000. B and C's modified adjusted gross income is $300,000, which exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NII taxes on the lesser of $225,000 (B's NII) or $50,000 (the amount B and C's modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe NII taxes of $1,900 ($50,000 x 3.8 percent).

For more information, read the IRS's Q&A on Net Investment Income at http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (readers@juliejason.com).