For the 2013 tax year, there is a new 3.8% net investment income tax (also known as the Medicare contribution tax) on some categories of passive investment income (e.g., interest, dividends, annuities, rents, etc.) for individuals, trusts, and estates that exceed certain income thresholds. The surtax is a separate tax calculation that is added to your regular federal income tax. As a result, it could be advantageous to identify these income sources and adopt strategies to lower your modified adjusted gross income ( MAGI ) or your net investment income.
Income from an active trade or business is not included in net investment income, nor is wage income. However, passive business income is subject to the surtax. Thus, rents from an active trade or business are not subject to the surtax, but rents from a passive activity are subject to the surtax.
The new tax will only affect taxpayers whose MAGI exceeds $250,000 for joint filers and surviving spouses; $200,000 for single taxpayers and heads of households; and $125,000 for married individuals filing separately. Currently, these thresholds are not indexed for inflation; therefore, as the years go by, inflation will cause more taxpayers to become subject to the 3.8% surtax. If your MAGI is greater than the threshold that applies to you, the 3.8% surtax will apply to the lesser of (1) your net investment income for the tax year, or (2) the amount of your MAGI that exceeds the specific threshold amount for the tax year.
(Note: If you claim the foreign income exclusion, you are required to add back the excluded income for the purposes of the 3.8% surtax).
If you think the new tax may apply to you, PYA can explain your choices and help you select the best tax strategy. Contact PYA at (800) 270-9629.
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
