Net investment income tax

Have you heard about the new 3.8% surtax on unearned income effective for the 2013 tax year? This is a funding provision of the Affordable Health Care Act (also known as “Obamacare”) passed in 2010. Basically, this tax may apply to individuals with adjusted gross income over $200,000 ($250,000 for a joint return or $125,000 for married filing separate). Specifically, the tax equals 3.8% of the lesser of:
 

1. Net investment income. This includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business) reduced by deductions properly allocable to such income.
2. The excess of Adjusted Gross Income over $200,000 ($250,000 for a joint return or $125,000 for married filing separate).

This new tax, along with increased 2013 income tax rates from last year-end’s fiscal cliff compromise legislation, will cause many taxpayers to have much larger federal income tax for 2013 than for 2012. If you did not take this into account in adjusting your wage withholding or estimated tax payments for 2013, you may have a very unpleasant surprise in the form of a large tax balance due come April 15, 2014. There is still time to lessen the blow by adjusting wage withholding for the remainder of the year or making or increasing the remaining tax estimates payment (4^th quarter 2013, due by Jan. 15, 2014).

Please contact us if you need some additional info on this new tax or other year-end tax planning advice. 

Jim Story
Manager - Tax Department